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Keyword: Employee Stock Purchase Plan

This is archived information that pertains only to the 2005 Tax Year. If you
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How do I report participation in a qualified employee stock purchase plan on my tax return?

If you participated in a qualified employee stock purchase plan, you do not include any amount in your gross income as a result of the grant or exercise of your option to purchase stock. When you sell the stock that you purchased by exercising the option, you may have to report compensation and capital gain or capital loss. For additional information on tax treatment and holding period requirements, refer to Publication 525, Taxable and Nontaxable Income.


I purchased stock from my employer under a qualified employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

If the special holding period requirements are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

  1. The option price of the stock was below the stock's fair market value at the time the option was granted, or
  2. You did not meet the holding period requirement.

The holding period requirements is that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet these holding period requirements, there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disqualifying disposition is the excess of the fair market value of the stock on the date the stock was transferred to you less the amount paid for the shares.

If the holding period requirements are met, but the option price is below the fair market value of the stock at the time the option was granted, you report the discount as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition less the exercise price OR the excess of the fair market value of the stock at the time the option was granted less the exercise price.

If the holding period requirement are met and your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.

For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.


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