Employee Stock Plan Taxes and Tax Filing: Understanding Taxes on Stock Plans | Fidelity (2024)

FAQs

How does an employee stock purchase plan affect taxes? ›

When you buy stock under an employee stock purchase plan (ESPP), the income isn't taxable at the time you buy it. You'll recognize the income and pay tax on it when you sell the stock. When you sell the stock, the income can be either ordinary or capital gain.

You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.

Form W-2 Your W-2 includes the taxable income from your ESPP. This form is provided by your employer. Form 3922 Form 3922 has details about your ESPP purchase that will help you report the income from your sales of ESPP stock. This form is provided by your employer.

If you've owned the stock for less than a year before selling it at a profit, you'll owe taxes on it at your regular income tax rate. If you owned the stock for more than a year, the long-term capital gains tax rates will apply. These rates are dependent on your overall income, but may be 0%, 15% or 20%.

They can only report the unadjusted basis — what the employee actually paid. To avoid double taxation, the employee must use Form 8949. The information needed to make this adjustment will probably be in supplemental materials that come with your 1099-B.

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.

They can only report the unadjusted basis, or what the employee paid for the stock. To avoid double taxation, the employee must make an adjustment on Form 8949. Warning: Do not use the box labeled “1g Adjustments” on Form 1099-B to make this adjustment; that is for something else entirely.

ESOP distributions are taxed as ordinary income, but if you receive a lump-sum distribution in the form of stock, you'll generally pay ordinary income tax on the value of your employer's contributions to the plan, plus capital gains tax on the appreciation in stock value when the stock is sold.

When you buy an open-market option, you're not responsible for reporting any information on your tax return. However, when you sell an option—or the stock you acquired by exercising the option—you must report the profit or loss on Schedule D of your Form 1040.

For example, say the company's stock is selling at $20 per share, but your ESPP offers it for $15. You will then owe income taxes on that $5 per share, as that value would be considered a taxable benefit. In all cases, the income you dedicate to an ESPP is after-tax income.

How can I reduce my ESPP taxes? ›

Selling ESPP stock after holding it for more than 18 months will often result in the most favorable tax treatment. However, it is important to remember that taxes should not be the only (or perhaps even primary) consideration in a decision to sell or hang onto shares of company stock.

Is an ESPP pre tax or post tax? ESPP shares are post-tax. It means your shares are purchased with money that you've already paid taxes.

Step 1: Go to the e-filing portal > File ITR > Select assessment year (AY 2024-25) > Select ITR form (ITR-3 for trading income). Note, if you have just capital gains on sale of equity shares and mutual funds, you need to select ITR-2. Step 2: Select the reason for filing the ITR and proceed.

You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there's no net capital gain subject to tax. You must first determine if you meet the holding period.

If you don't report the cost basis, the IRS just assumes that the basis is $0 and so the stock's sale proceeds are fully taxable, maybe even at a higher short-term rate. The IRS may think you owe thousands or even tens of thousands more in taxes and wonder why you haven't paid up.

ESOP distributions are taxed as ordinary income, but if you receive a lump-sum distribution in the form of stock, you'll generally pay ordinary income tax on the value of your employer's contributions to the plan, plus capital gains tax on the appreciation in stock value when the stock is sold.

An ESOP can't pay above fair market value and can't match the higher price a synergistic buyer can offer… Sometimes a motivated buyer like a competitor may offer a price the ESOP (limited to paying fair market value) cannot match.

The rollover option defers income taxes on the ESOP distribution, and recipients of a payout typically have 60 days to complete the ESOP rollover into an IRA. Funds become subject to the rules of the plan into which they have been rolled over.

An ESPP can be a surprisingly powerful benefit. If you have access to one, it's worth your time to research your plan and consider enrolling. ESPPs can potentially generate a return in 3 ways: with a discount, with a lookback provision, and through the performance of the underlying company stock.