An Internal Revenue Service-approved employee stock purchase plan, or ESPP, provides favorable tax treatment to employees when they buy and sell company stock. Employees can sell their shares at any time, but they must meet two IRS conditions to retain the favorable tax treatment: The shares must be held for at least two years after enrolling in the ESPP, and they must be held for at least one year after the purchase date. If either condition is not met, the sale is disqualified under IRS regulations and must be reported on Schedule D.
Using Form 8949, go to Part I if the sale occurred within one year of buying the stock or Part II if the sale occurred more than one year after the purchase. Find the original stock purchase price, which is also known as the basis, on your 1099. Now check Box A on Form 8949, as the transaction was reported to the IRS with basis. Move down to Column A, Description of Property, and enter either the name of the stock or the stock symbol and the number of shares you sold. Skip Column B and in Column C, Date Acquired, enter the day you purchased the stock. Enter “various” in the column if you purchased stock on more than one day. In Column D, Date Sold, enter the day the stock was sold.Step 2
Enter the amount reported on your 1099 on Form 8949 in Column E, Sales Price. The fees and commission have already been deducted from this amount. Move to Column F, Cost or Other Basis, and compute the amount you paid for the stock by multiplying the number of shares by the cost per share, and then add in the income reported on your W-2 to get the total cost. Enter that figure in Column F. Skip Column G. Scroll down to Line 2 if you entered the data in Part I or Line 4 if you used Part II, and enter the totals for Columns E and F.Step 3
Find the totals you entered on Form 8949, Line 2 or Line 4, Columns E and F. Transfer those amounts to Schedule D, Line 1 or Line 8, Columns E and F. Skip Column G. Now subtract Column E from Column F and enter that amount in Column H. Complete the Schedule D and transfer the final amount to Form 1040.
Items you will need
- IRS Form W-2
- IRS Form 1099
- IRS Form 8949
- IRS Schedule D
- Remember to include the amount reported on your W-2 when calculating the stock acquisition cost so you don’t pay tax on this income twice.
- Consider meeting the sale date criteria to avoid having the sale disqualified and losing the preferential tax treatment.
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