TurboTax / Tax Calculators & Tips / All Tax Guides / Investments and Taxes / Employee Stock Purchase Plans

Employee Stock Purchase Plans

Updated for Tax Year 2014


OVERVIEW

Get information about how your employee stock purchase plan can impact your taxes.


Got investments?

From stocks and bonds to rental income, TurboTax Premier helps you get your taxes done right

For only $79.99*
Start for Free

Buying company stock at a discount

Many large companies offer Employee Stock Purchase Plans (ESPP) that let you buy your employer's stock at a discount. These plans are offered as an employment incentive, giving you an opportunity to share in the growth potential of your company's stock (and by implication, work hard to keep the stock price moving ahead).

Usually, you make contributions to a stock purchase fund for a certain period of time through payroll deductions. At designated points in the year, your employer then uses the accumulated money in the fund to purchase stock for you.

In many plans, the price that you pay for the stock is the stock price at the time you started contributing to the fund, or the stock price at the time your employer purchases the shares on your behalf, whichever is lower, with a discount of up to 15 percent. Either way, you get to buy the stock at a price that's lower than the market price. Your discounted price is known as the offer or grant price.

The company keeps the stock in your name until you decide to sell it. At that point you have to begin thinking about taxes.

But what about taxes?

When the company buys the shares for you, you do not owe any taxes. You are exercising your rights under the ESPP. You have bought some stock. So far so good.

When you sell the stock, the discount that you received when you bought the stock is generally considered additional compensation to you, so you have to pay taxes on it as regular income.

If you hold the stock for less than a year before you sell it, any gains will be considered compensation and taxed as such. If you hold the shares for more than one year, any profit will be taxed at the usually lower capital gains rate.

How much of the stock sale price is compensation and how much is capital gain?

That depends on whether your stock sale is a qualifying disposition or a disqualifying disposition.

Both terms are defined below.

Disqualifying Disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income. The bargain element is the difference between the exercise price and the market price on the exercise date. Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.

Qualifying Disposition:

You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the “bargain element”) is considered compensation income (taxed at regular rates) on your Form 1040. Any additional profit is considered long-term capital gain (which is be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses. 

Situation 1: Disqualifying Disposition Resulting in Short-Term Capital Gain

In this situation, you sell your ESPP shares less than one year after purchasing them.

Example:

Offering date: 1/01/2013 Market price: $30
Exercise (purchase) date: 6/30/2013 Market Price: $25
15 percent discount Actual cost: $21.25
Actual sale date: 1/20/2014 Market price: $50
Commission paid at sale $10  
Number of shares: 100  

 

This is a disqualifying disposition (sale) because you sold the stock less than two years after the offering (grant) date and less than a year after the exercise date.

Because this is a disqualifying disposition, your employer should include the bargain element in Box 1 of your 2014 Form W-2 as compensation. The bargain element is calculated this way:

  1. Subtract the actual price paid from the market price at the exercise date
  2. Multiply the result by the number of shares: ($25 - $21.25) x 100 = $375

Even if your employer didn't include the bargain amount in Box 1 of Form W-2, you must report this amount as compensation income on line 7 of your Form 1040.

You must also show the sale of the stock on your 2014 Schedule D, Part I for short-term sales because there was less than one year lapsed between the date you acquired the stock (June 30, 2013) and the date you sold it (January 20, 2014).

The sales price you report on Schedule D is $4,990 and the cost basis is $2,500. Your short-term capital gain is the $2,490 difference ($4,990 - $2,500).

How did we come up with these amounts?

The gross sales proceeds from selling the shares is the market price at the date of the sale ($50) times the number of shares sold (100), or $5,000. You then subtract any commissions paid at the sale ($10 in this example), to arrive at the sales price amount of $4,990 reported on Schedule D. Your broker will show this amount on Form 1099-B that you'll receive at the beginning of the year following the year you sold the stock.

The cost basis is the actual price you paid per share (the discount price) times the number of shares ($21.25 x 100 = $2,125), plus the amount reported as income on line 7 of your form 1040 (the $375 bargain element we calculated above), for a final cost basis of $2,500.

Situation 2: Disqualifying Disposition Resulting in Long-Term Capital Gain

In this situation, you sell your ESPP shares more than one year after purchasing them, but less than two years after the offering date.

Example:

Offering date: 6/30/2012 Market price: $30
Exercise (purchase) date: 1/01/2013 Market price: $25
15 percent discount Actual cost: $21.25
Actual sale date: 1/20/2014 Market price: $50
Commission paid at sale $10  
Number of shares: 100  

 

This is a disqualifying disposition because you sold the stock less than two years after the offering (grant) date. As in the previous example, your employer should include the bargain element in your wages on your 2014 Form W-2. The bargain element is the same as in the first example ($375). You must report this amount as compensation income on line 7 of your 2014 Form 1040.

You must show the sale of the stock on your 2014 Schedule D. It's considered long-term because more than one year passed from the date acquired (January 2, 2010) to the date of sale (January 20, 2014). That is good, because long-term capital gains are taxed at a rate that is lower than your regular tax rate.

In this example, as in the previous one, the sales price you report on Schedule D is $4,990 and the cost basis is $2,500. The long-term gain is the difference of $2,490. ($4,990 - $2,500).

Situation 3: Qualifying Disposition With Stock Price Increase Between Offering Date and Purchase Date

In this situation, you sell your ESPP shares more than one year after purchasing them, and more than two years after the offering date and the market price actually increased from the offering date to the exercise date.

Example:

Offering date: 1/01/10 Market price: $15
Exercise date: 6/30/10 Market price: $25
15 percent discount Actual cost: $12.75
Actual sale date: 1/20/2014 Market price: $50
Commission paid at sale $10  
Number of shares: 100  

 

This, is also a qualifying disposition (sale) because over two years have passed between the offering date and the sale date, and over one year has passed between the date of purchase and the date of sale. And this time, the price per share increased from the offering date to the purchase date.

Again, your employer might not report anything on your 2014 Form W-2 as compensation. But you will still need to report some ordinary income on line 7 of your 2014 Form 1040, as "compensation." You report the lesser of:

  • The gross sales price of $5,000 minus the $1,275 actual discounted price paid for the shares ($12.75 x 100) minus the $10 sales commission= $3,715, or
  • The per-share company discount times the number of shares. ($2.25 x 100 shares = $225).

So you must report $225 on line 7 on the Form 1040 as "ESPP Ordinary Income."

You must also report the sale of your stock on Schedule D, Part II as a long-term sale. It's long term because there is over one year between the date acquired (6/30/10) and the date of sale (1/20/2014).

The sales price reported on Schedule D is $4,990 ($5,000 gross proceeds - $10 commission). The cost basis is the actual price paid per share times the number of shares ($12.75 x 100 = $1,275), plus the amount that you're reporting as compensation income on line 7 of your Form 1040 ($225). Therefore, your total cost basis is $1,500, and the long-term capital gain reported on Schedule D is $3,490 ($4,990 - $1,500).

Bottom line

Your employer is not required to withhold Social Security (FICA) taxes when you exercise the option to purchase the stock. Also, your employer is not required to withhold income tax when you dispose of the stock. But you still owe some income tax on any gain resulting from the sale of the stock.


The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

DAYS left
LAST DAY to file
1 DAY left
to file your taxes by April 15
2014 taxes due today
Start for Free
* Important Offer Details and Disclosures
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Actual prices are determined at the time of print or efile and are subject to change without notice. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal efile of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Prices subject to change without notice.
  • TurboTax Mobile: Actual prices are determined at the time of print or efile and are subject to change without notice. Come back here before you file to confirm that the price has not changed, especially if it's been a while since you downloaded this app.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app features and content. TurboTax mobile app devices supported include Android 4.1 and above, iOS 8 on iPhone 4s and above, and iPad 2.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $34.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • About our TurboTax Product Experts: Customer service and product support (phone or chat) vary by time of year. Phone support not included with Free Edition.
  • About our credentialed tax experts: Live tax advice service is available for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Click here for full terms and conditions. Not available for TurboTax Business customers.
  • Get up to 10% on top of your federal refund: Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online (except Federal Free Edition) or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. Except as required by law, Amazon.com Gift Cards cannot be canceled, transferred for value or redeemed for cash.

    Amazon.com is not a sponsor of this promotion. Except as required by law, Amazon.com Gift Cards ('GCs') cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com or its affiliates. No expiration date or service fees.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2013 TurboTax products.
  • 4.8 out of 5 stars: Average based on customer ratings on TurboTax.com for TurboTax Online and CD/download products tax year 2014, as of January 2015.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • TurboTax CD/Download priority phone support: Priority phone support for TurboTax CD/Download Premier and Home & Business is accessible exclusively via the TurboTax.com Help Center.
  • Benefit Assist: After you file, TurboTax automatically shows you a full list of government benefits you may qualify for, like Food Stamps or reduced phone & utilities. Plus, we help you apply, saving you time and making it easier than ever to get more money! Estimate based on calculation of Benefit Assist users from tax year 2013 and published reports of average benefit and savings amounts from federal and state programs. Actual amounts and qualifications based on your individual situation; some individuals will not qualify. Feature may not be available for all customers.
  • Simplified State Experience: New, simplified state tax preparation available for most filers.
  • Eligibility for $25 cash back for returning Deluxe customers: Customers who have completed their 2013 taxes in TurboTax Deluxe (CD or download), and have completed their 2014 taxes in either TurboTax Premier or TurboTax Home & Business (CD or download), and apply here before 11:59PM PDT April 20, 2015, are eligible for $25 back. 2014 TurboTax Advantage users are ineligible for this offer. Terms and conditions are subject to change without notice.
  • $0 Upgrade Offer: Valid for customers who filed their 2013 taxes with TurboTax Deluxe (CD or download), completed prior year data transfer this year, and encounter an upgrade to either 2014 TurboTax Premier or 2014 TurboTax Home & Business (CD or download). Valid February 6, 2015 through April 20, 2015. TurboTax Advantage users are ineligible for this offer. This offer may not be combined with our $25 cash back offer. Terms and conditions are subject to change without notice.