Daily Tax Tip Spotify Podcast and/or WordPress Blog Post and Employee Stock Purchase Plan Options

This Tax Tip Spotify Podcast and/or WordPress Blog Post understands that your employer has granted you options under a Section 423 “employee stock purchase plan” and that you would like some basic information regarding the tax implications of this grant.

An employee stock purchase plan (ESPP) option is a type of statutory stock option, which means the option and the plan under which it is granted must meet certain statutory requirements on the date of grant. If an option qualifies as an ESPP option, special tax treatment is available.

You do not recognize any taxable income at the time your employer grants the employee stock purchase plan (ESPP) option. Nor will you generally recognize any income when you exercise the employee stock purchase plan (ESPP) option. Instead, if you satisfy a special employee stock purchase plan (ESPP) holding period requirement and an employment requirement, you will recognize capital gain or loss when you sell (or otherwise dispose of) the stock you acquire under the employee stock purchase plan (ESPP). Generally, your capital gain or loss is the difference between the amount you receive on the sale and the amount you pay for the stock. You report the sale on Form 8949, Sales and Other Dispositions of Capital Assets. To satisfy the employee stock purchase plan (ESPP) holding period requirement, you must not dispose of the stock you receive under the employee stock purchase plan (ESPP) before the end of the later of:

1. the one-year period after the stock was transferred to you, or
2. the two-year period after the option was granted to you.

A different rule applies if at the time the employee stock purchase plan (ESPP) option was granted, the exercise price per share was less than 100 percent (but not less than 85 percent) of the fair market value of the share. In that case, if you sell the employee stock purchase plan (ESPP) stock after meeting the holding period requirement (or if you die while owning the stock), you must include in your gross income as ordinary compensation income (and not as capital gain) the lesser of

1. the amount by which fair market value of the stock on the date of the grant exceeds the amount you paid to exercise the option, or
2. the amount by which fair market value of the stock on the date you dispose of the stock (or on the date of your death while owning the stock) exceeds the amount you paid to exercise the option. The amount of compensation resulting from the application of this rule is included in your gross income for the tax year in which the disposition occurs, or for the tax year closing with your death, whichever event trigger the rule’s application. Any gain in excess of the amount treated as ordinary compensation income is taxed as capital gain.

If you sell (or otherwise dispose of) employee stock purchase plan (ESPP) stock before satisfying the holding period requirement, you have made a so-called disqualifying disposition. In that case, if you have a gain from the sale, the gain is ordinary compensation income up to the amount by which the stock’s fair market value when you exercised the option exceeded the exercise price. Any excess gain is capital gain. These amounts are included in your gross income in the tax year in which the disqualifying disposition occurs. If you have a loss from the sale, it is a capital loss and you do not have any ordinary income. In determining capital gain or loss, your basis in the stock is the amount you paid to exercise the option plus the amount reported as wages.

To satisfy the employment requirement you must at all times during the period beginning with the date the employee stock purchase plan (ESPP) option is granted and ending on the day three months before the date you exercise the employee stock purchase plan (ESPP), be an employee of either:

1. the corporation that granted the option or a corporation related to that corporation; or
2. a corporation (or a corporation related to that corporation) that substituted or assumed the employee stock purchase plan (ESPP).

Thus, if you leave your job while holding an unexercised employee stock purchase plan (ESPP) option, you generally must exercise that option within three months after leaving to qualify for the special tax rules applicable to employee stock purchase plan (ESPP) options. If you exercise an employee stock purchase plan (ESPP) option after the end of the three-month period, the option will be taxed under the rules relating to nonstatutory options.

Please call me at your convenience so we can discuss in more detail the tax implications of your employee stock purchase plan (ESPP) options, including the tax consequences of the modification, expiration, disposition, or cancellation of the options.

Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.

DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260

Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
Fax: (760)836-0968

Email: DonFitchCPA@paylesstax.com
Website: https://www.paylesstax.com

P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.

(Updated 05013021-1 320-319)