Employee Stock Purchase Plan (ESPP)
You will need to review the information you received on Form W-2 and/or Form 1099-B before making your entries into the program. Outlined below is a series of steps you will need to review before entering your stock transaction information into the TaxAct program.
- Compensation income. Stocks purchased through an employee stock purchase plan are purchased at a discount. This discount is outlined in the terms of the purchase plan and will differ between companies. The discount the employee receives on the stock purchase is considered compensation income and reported as ordinary income. This amount will depend on whether you have a qualifying disposition or a disqualifying disposition. See the information below for more information.
- Form W-2. The compensation income should have been included in your Form W-2 you received from your employer maintaining the plan. You may need to contact your employer or plan administrator to determine if any amount was included on your Form W-2 as wages. You should have also received literature from them on the tax treatment of the plan you are under and how it is reported.
- Reporting compensation income. If the compensation income was reported on Form W-2, then you will simply enter your Form W-2 as normal. If any compensation income was NOT included on Form W-2, see the additional information below.
- Basis. An employee’s basis in the stock purchase will be the amount paid for the stock PLUS the compensation income reported.
- Reporting the sale. You will then report the sale of the stock on a Form 1099-B. You will enter the sales proceeds as reported on the Form 1099-B you received. If basis was NOT reported on the Form 1099-B you received, then you will enter the basis as calculated in step 4 above. If the basis was reported on the Form 1099-B you received then you will need to compare the amount reported with the amount calculated in step 4 above. You will need to enter the basis as it was reported on the Form 1099-B you received. If this amount does not equal the basis calculated in step 4 then you will enter an adjustment code (B) and adjustment amount to account for an incorrectly reported basis. For more information about entering an adjustment code and adjustment amount see the IRS Form Instructions.
Qualifying vs. Disqualifying Disposition
A qualifying disposition means both of the following are true regarding your sale:
- It is more than a year after the purchase of the stock.
- It is more than two years after the grant date. This would be the first day of the offering period, sometimes referred to as the enrollment date
The compensation income for a qualifying disposition is the lesser of two amounts. The first amount is the discount allowed on the purchase of the stock. This would be the difference between the fair market value (FMV) of the stock on the grant date and the actual amount you paid for the shares. The second amount is the difference between the FMV of the stock when you disposed of it and the actual amount you paid for the shares.
For a disqualifying disposition, the compensation income is calculated as the value of those shares on the date of purchase minus the amount you paid for them. Generally, this would be the discount you received on the stock purchase.
Reporting in TaxAct
If there are any capital gains to report or if you received a Form 1099-B, you would need to complete Federal Form 1099-B in the program to report the information on Form 8949 and Schedule D.
The information would be entered in the Investment Income section of TaxAct as follows:
- From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
- Click Investment Income to expand the category and then click Gain or loss on sale of investments
- Click Capital gain or loss (Form 1099-B)
- Click New Copy of Form 1099-B (Desktop users click Add) to create a new copy of the form or click Review to review a form already created
- When you reach the screen titled Investment Sales - Other Items, select Employee stock purchase plan (ESPP), then click Continue
- The program will proceed with the interview questions for you to enter or review the appropriate information
Compensation Income not Reported on Form W-2
TaxAct allows you to add the ordinary income from an ESPP sale to your wages on Form 1040, Line 1, if this amount has NOT been included in your wages by your employer. You would enter this compensation (wage) income on the screen titled Investment Sales - ESPP Compensation Income if you need to report this income as wages.
Information regarding stock options can be found in IRS Publication 525 Taxable and Nontaxable Income.