Do You Report Form 3922 on Your Tax Return? A Deep Dive

The short answer is: Generally, no, you don’t directly report Form 3922 on your tax return. Form 3922, “Transfer of Stock Acquired Through an Employee Stock Purchase Plan (ESPP) Under Section 423(c),” is primarily an informational document. It helps you calculate your taxable income when you sell the stock acquired through the ESPP. Let’s unpack why this is the case and delve into the intricacies of ESPPs and Form 3922.

Understanding Employee Stock Purchase Plans (ESPPs)

ESPPs are a fantastic employee benefit offered by many companies. They allow employees to purchase company stock, often at a discounted price. This discount can be substantial, making it an attractive way to invest in the company’s future. Here’s a quick rundown of how ESPPs generally work:

• Enrollment Period: You sign up to participate in the plan during an enrollment period.
• Payroll Deductions: Money is deducted from your paycheck over a specified period (e.g., six months).
• Purchase Date: At the end of the deduction period, the accumulated funds are used to purchase company stock. The price is often set at a discount to the market price on either the grant date (beginning of the offering period) or the purchase date, whichever is lower. This “look-back” provision is a key advantage.
• Holding Period: You can sell the stock immediately, but you might incur ordinary income tax on the bargain element. To qualify for more favorable long-term capital gains tax rates, specific holding period requirements must be met.

The Role of Form 3922

Form 3922 isn’t filed with your tax return. Instead, it’s provided to you (and the IRS) by your employer. The form contains critical information you’ll need when you eventually sell the stock acquired through the ESPP. Think of it as a roadmap for calculating your gains or losses and reporting them correctly.

Here’s what you’ll typically find on Form 3922:

• Employee Information: Your name, address, and Social Security number.
• Employer Information: The company’s name, address, and employer identification number (EIN).
• Grant Date: The date the option to purchase the stock was granted.
• Exercise Date (Purchase Date): The date you actually purchased the stock.
• Fair Market Value (FMV) on Grant Date: The market price of the stock on the grant date.
• Fair Market Value (FMV) on Exercise Date: The market price of the stock on the exercise date.
• Purchase Price per Share: The discounted price you paid for each share.
• Number of Shares Transferred: The number of shares you purchased.

This information is crucial because it helps you determine the bargain element – the difference between the fair market value of the stock and the price you paid for it. This bargain element is often taxed as ordinary income.

Reporting the Sale of ESPP Stock

When you sell the stock acquired through your ESPP, that’s when tax implications come into play and when the information from Form 3922 becomes essential. You’ll report the sale on Schedule D (Form 1040), Capital Gains and Losses. The profit or loss will be the difference between your sales proceeds and your adjusted basis. The adjusted basis calculation takes into account the ordinary income you recognized from the bargain element.

Here’s a breakdown of how it works:

1. Determine the Holding Period: Did you meet the holding period requirements to qualify for long-term capital gains rates? Generally, this means holding the stock for at least two years from the grant date and one year from the purchase date.
2. Calculate the Bargain Element: This is the difference between the fair market value of the stock on the exercise date and the purchase price. This amount is typically treated as ordinary income in the year you sell the stock (assuming you met the holding period requirements).
3. Determine Your Basis: Your basis in the stock is the purchase price plus the bargain element that was included in your ordinary income.
4. Calculate Capital Gain or Loss: Subtract your basis from the proceeds you received when selling the stock. This will result in either a capital gain (if you sold the stock for more than your basis) or a capital loss (if you sold the stock for less than your basis).

Tax Implications and Holding Periods

The tax treatment of ESPP stock sales hinges on the holding period. Here’s a quick reference:

• Qualifying Disposition: Occurs when you sell the stock more than two years after the grant date and more than one year after the purchase date. In this case, the bargain element (FMV on the purchase date minus the purchase price) is taxed as ordinary income. Any additional gain is taxed as a long-term capital gain.
• Disqualifying Disposition: Occurs when you sell the stock before meeting both holding period requirements. The bargain element (FMV on the purchase date minus the purchase price) is taxed as ordinary income in the year of the sale. The difference between your sales price and the FMV on the purchase date is then treated as either a short-term or long-term capital gain, depending on how long you held the stock from the purchase date.

Example

Let’s say you purchased 100 shares of company stock through an ESPP at $50 per share. The fair market value on the purchase date was $75 per share.

• Purchase Price: $50 per share
• Fair Market Value (Purchase Date): $75 per share
• Bargain Element: $25 per share ($75 – $50)

If you hold the stock long enough for a qualifying disposition, $25 per share will be taxed as ordinary income. If you later sell the stock for $100 per share, the additional $25 per share ($100 – $75) will be taxed as a long-term capital gain. If you have a disqualifying disposition, the bargain element is still taxed as ordinary income.

Frequently Asked Questions (FAQs) About Form 3922

1. What if I don’t receive Form 3922?

If you sold ESPP stock and didn’t receive Form 3922 from your employer, contact your employer’s stock plan administrator. They are required to provide you with this form. You can also access this information from the brokerage account where the stock is held in most cases.

2. What if the information on Form 3922 is incorrect?

Contact your employer immediately if you find any errors on Form 3922. They will need to issue a corrected form. Failure to correct the information can lead to inaccurate tax calculations.

3. Does Form 3922 need to be attached to my tax return?

No, Form 3922 is not attached to your tax return. It’s for your records and to help you accurately calculate your capital gains or losses.

4. What happens if I forfeit my ESPP shares before purchasing them?

If you leave your company or cancel your participation in the ESPP before the purchase date, you’ll typically receive a refund of the money you contributed. There are generally no tax implications in this scenario. You never owned the stock, so there’s nothing to report.

5. How does Form 3922 impact my state taxes?

The impact of Form 3922 on your state taxes depends on your state’s tax laws. Most states follow federal guidelines for capital gains and losses, so the bargain element and any capital gains will likely be taxable at the state level as well.

6. Can I deduct losses from my ESPP stock sales?

Yes, you can deduct capital losses from the sale of ESPP stock, subject to the usual limitations on capital loss deductions ($3,000 per year, or $1,500 if married filing separately).

7. What if I don’t sell my ESPP stock?

If you don’t sell your ESPP stock, you won’t need to use Form 3922 for that tax year. The tax implications only arise when you sell the stock.

8. How does a stock split affect Form 3922?

A stock split doesn’t directly change the information reported on Form 3922. However, you’ll need to adjust your cost basis and the number of shares accordingly when you calculate your capital gain or loss. The split adjusted values can be found in the 1099-B issued from the brokerage.

9. What is the difference between Form 3922 and Form W-2?

Form 3922 reports the details of stock transferred to you under an ESPP, while Form W-2 reports your wages and other compensation from your employer. The bargain element from a disqualifying disposition is often included in your W-2 in the year of the sale.

10. Can I contribute to a Roth IRA with the proceeds from selling ESPP stock?

Yes, you can contribute to a Roth IRA with the proceeds from selling ESPP stock, subject to the usual Roth IRA contribution limits and income restrictions.

11. What is a “look-back” provision in an ESPP?

A “look-back” provision allows you to purchase the stock at a discount based on the lower of the fair market value on the grant date or the purchase date. This is a significant advantage because it maximizes your potential profit.

12. Where can I find more information about ESPPs and taxes?

You can find more information about ESPPs and taxes on the IRS website (irs.gov). You can also consult with a qualified tax advisor or financial planner.