Employee Stock Purchase Plan (ESPP) Cost Basis
Employee Stock Purchase Plan (ESPP) Cost Basis
Get accurate cost basis information on all your Qualified and Disqualified ESPP shares.
What is ESPP?
Employee Stock Purchase Plan (ESPP) is an easy and cost-effective way for employees to invest in their company’s shares through a discount plan. There are special tax considerations when ESPP shares are sold and how the discount amount is properly treated.
Why is the cost basis tax reporting different for ESPP shares?
The income recognized will be treated either as ordinary or capital gains. Additionally, ESPP shares have different tax treatments based on whether the shares are sold as qualified or disqualified dispositions.
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How can this Netbasis ESPP Tool help me?
It is very important to get the adjusted cost basis right. 1099-B information can often be split between the selling broker and the company’s transfer agent. This can create a complex understanding on how to piece it all together.
The Netbasis ESPP tool can be very effective in addressing some of the tax complexities for ESPP transactions. When key participation plan information (offering price, discount rate, etc.) is entered into Netbasis, ESPP tax rules are automatically applied. The adjusted tax basis, capital gain/loss amounts, and ordinary income are instantly calculated. The information results are then provided in a comprehensive report for pre-trade decisions and/or year end tax reporting.
Netbasis will automatically adjust for any corporate action event (splits, spin-offs) during the holding period and determine the adjusted cost basis for all the shares owned. Netbasis allows for different sale method selections (FIFO, LIFO, LOFO HIFO, etc) on shares sold to minimize capital gain tax liabilities and will auto-populate all trade information on the IRS 8949 and Schedule D forms.
ESPP Tax Sale Planning
Netbasis provides an ESPP tax sale planning tool that allows users to simulate their trade ahead of the actual sale. This allows the user to pre-evaluate the tax consequences with each sell decision. The user can also predetermine how much in cash proceeds will be received after taxes. A detailed report identifying the specific tax lots required to achieve the desirable tax strategy.
Netbasis helps avoid the 5 biggest ESPP mistakes
1
Often shareholders pay the taxes on ordinary income (discount) too early in qualified plans.
In qualified plans, ordinary income should be paid at the time of the sale. In non-qualified plans, ordinary income is paid at the time of purchase. Netbasis ESPP calculates the ordinary income amount, regardless of the type of plan and when the taxable income needs to be reported.
2
The information on the IRS 8949 form is often incomplete when filled out after ESPP shares are sold.
When ESPP shares are either bought and sold in the same year or when those shares are sold in later years, the accuracy of tax information can be a challenge. On Demand, Netbasis ESPP will auto-populate all ESPP share transactions on the IRS 8949 and Schedule D forms.
3
Shareholders misunderstand that fully adjusted cost basis information may not be reported by the broker on the 1099-B forms.
According to IRS rules, Form 1099-B issued by your broker cannot report the compensation element as part of your cost basis. In other words, only the purchase price is provided. ESPP plan purchases and sales may be made in different accounts and with different brokers. This can often lead to missing or incomplete corporate action event adjustments and wash sale deferral amounts.
Netbasis ESPP tool will provide the complete adjusted cost basis information based on:
- 1. The compensation element adjustment
- 2. The corporate action events (splits, spin-offs, etc)
- 3. Any potential wash sale violations
4
Paying the wrong tax rate or doubling the tax amount owed on ESPP shares sold.
In a qualified plan, when ESPP shares are sold, they are subjected to two different disposition types that may have different capital gains tax rate outcomes. Multiple sale positions make the separation of qualified and disqualified dispositions more difficult to report correctly.
Additionally, because ordinary income is reported on the W-2 by your employer, there is a common risk of paying the taxes on the ordinary income amount twice when reporting the capital gain/loss amounts on the IRS 8949 Form. Netbasis ESPP will automatically recognize the right sale disposition type and calculate the appropriate capital gain/loss amount(s). Netbasis will also calculate and identify the ordinary income amount to then automatically add it to the adjusted cost basis.
5
Not understanding how to reduce taxes using strategic sales methods to determine the best way to minimize capital gains taxes on ESPP sales.
Ordinary income and capital gain taxes can be painful when ESPP shares are sold. Often when the tax amounts are calculated, the time to react is too late. Netbasis has a special feature for ESPP shares that can be used to pre-determine the capital gains or loss amounts with each position sold. The sales method feature allows its users to explore each sale vs purchase combination (FIFO, LIFO, Specific, etc) to reach the best tax outcome for the amount(s) sold.
Netbasis provides an auto populated and saved completed IRS 8949 form with each Trade Activity
Netbasis ESPP can be effective in addressing the common tax complexities with ESPP transactions. Netbasis provides a comprehensive report that identifies all important calculations for tax reporting. For your convenience, Netbasis can auto save both your input and output information in your profile section. Netbasis can also auto-populate all adjusted tax basis trade activity to the current year IRS 8949 and Schedule D forms.
Take Netbasis for a Test Drive!
Come try Netbasis for yourself! You can freely search securities along with their CUSIP, ticker, start and end date. In addition you can try out all the features in our Trade Activities UI. If you need to save time and taxes, get a Netbasis full comprehensive cost basis report. We have price options ranging from single report up to unlimited usage. Experience the future in cost basis reporting & analysis.
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