"basis not reported to the IRS" for ESPP - disqualifying disposition?

[jeromedawg]

Hey guys,

I noticed my short-term (disqualifying disposition) ESPP sales don't have their cost bases reported to the IRS. Is the basis not being reported the direct result of the stocks being sold as disqualifying dispositions?

From TurboTax's site, and from what I can glean, this is the case:
"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."

[MidWestLove]

if you are dealing with ESPP - my experience is that you should prepare to enter cost basis adjustments (qualifying or not). Same thing for multiple years,  all qualifying dispositions not taking for the account the discount that I was already taxed on in W2

[ncornilsen]

I have yet to get an accurate cost basis reported on a 1099 for a disqualifying disposition of an ESPP stock. I always have to adjust it.

[jeromedawg]

Thanks. So I'm assuming I can just reference the statements from my brokerage in the month in which the shares were purchased? I found the statements which show the cost basis. 

[Brilliantine]

Be careful though...

MY employer reports some additional income due to ESPP share purchases in my W2. So, if the fair market price on the magic date was $100, and if my ESPP sold me 50 shares @ $90, they report $500 additional income for me in my W2. If I just sell the shares at $100 within 1 year, I need to do nothing else in Turbo Tax.

[jeromedawg]

Be careful though...

MY employer reports some additional income due to ESPP share purchases in my W2. So, if the fair market price on the magic date was $100, and if my ESPP sold me 50 shares @ $90, they report $500 additional income for me in my W2. If I just sell the shares at $100 within 1 year, I need to do nothing else in Turbo Tax.

Sorry you kinda lost me. So what happens if you don't sell the shares within 1 year?

[seattlecyclone]

Refer to this thread for more discussion about this topic. In essence, when you sell ESPP shares for a gain you will have some wage income (reported on your W-2) and some capital gain income. These amounts depend on whether you have held the shares long enough to make a "qualifying disposition." However the IRS requires brokers to report the purchase price as the cost basis on Form 1099-B, which is almost always wrong! Your cost basis should be your purchase price plus the amount your employer reported as wages on your W-2. You'll need to report an adjustment in basis to avoid overpaying on your taxes.

[jeromedawg]

Refer to this thread for more discussion about this topic. In essence, when you sell ESPP shares for a gain you will have some wage income (reported on your W-2) and some capital gain income. These amounts depend on whether you have held the shares long enough to make a "qualifying disposition." However the IRS requires brokers to report the purchase price as the cost basis on Form 1099-B, which is almost always wrong! Your cost basis should be your purchase price plus the amount your employer reported as wages on your W-2. You'll need to report an adjustment in basis to avoid overpaying on your taxes.

When you say the brokers almost always report the purchase price incorrectly on the 1099-B, is that in all cases for both qualifying and disqualifying dispositions? I noticed when I added my long-term/qualifying dispositions, my amount owed in Taxact didn't change. It only changed upon adding my short-term gains.... if I didn't specify the cost basis, the amount owed skyrocketed but once I plugged in the cost basis per past statements, it went down.

[seattlecyclone]

Yes, reporting the amount paid for the shares as the cost basis is incorrect for both qualifying and non-qualifying distributions.

See Publication 525 for information about how the income from these shares is determined.

For a qualifying disposition, the difference between the price you paid and the fair market value on the option grant date counts as compensation income on your W-2.

For a disqualifying disposition, the difference between the price you paid and the fair market value on the purchase date counts as compensation income on your W-2.

In both cases, your cost basis should not be the price you paid for the shares, it should be the price you paid plus this compensation income that is already reported on your W-2. Adjusting your cost basis upward by this amount prevents this compensation income piece from being doubly taxed as both compensation and a capital gain.