When should I sell my shares from my ESPP?

I was eligible to sell 72 shares today. I did just that.

I took the long term capital gains of $1,860.88. With this money: I will either fund my Roth IRA at Fidelity on FZROZ or VTSAX taxable at Vanguard. What do you think I should do?
 
F.I.R.E User said:
I was eligible to sell 72 shares today. I did just that.

I took the long term capital gains of $1,860.88. With this money: I will either fund my Roth IRA at Fidelity on FZROZ or VTSAX taxable at Vanguard. What do you think I should do?
Click to expand...

Don't forget you will also owe ordinary income tax on the discount you received. The holding period for income calculation is 2 years from the offer date, not 1 year from the purchase date as it is for the long-term gains.

Assuming the stock went up between the offering date and the purchase date:
- if you held it for 2 years from the offering date, then you owe income tax on 15% of the price on the offering date. In this case, only the actual discount you received is considered income.
- if you held it for less than 2 years from the offering date, then you owe income tax on the difference between the price on the purchase date and the price you paid. In this case, the discount you received plus all gains during the offer period are treated as income.

This income will be reported on your W2 as wages in box 1, but it may or may not also be shown in box 14 or in an accompanying statement on your W2. You should get some paperwork by mail or e-mail lthat describes the transaction. Make sure to save it just in case your W2 doesn't have enough info to figure it out. You need to know the amount that's being treated as ordinary income because when you do your taxes you will add that amount to the basis shown on your 1099-B so that your long-term gains will be reduced. If you don't make this adjustment, then you'll end up paying both income tax and long term cap gains tax on the same money. Some brokerages will send you an extra statement at tax time that does the calcs for you, but not all of them do that, and you still have to know enough to read that statement and adjust the reported basis correctly on your tax return.

I understand the point of view that you should always sell ESPP shares on the first possible day to lock in the gain, but we always sold two years past the offer date to minimize the taxes. We only had a couple of times through the years where this would have meant taking a loss so we just held onto those shares until they were positive again.
 
cathy63 said:
Don't forget you will also owe ordinary income tax on the discount you received. The holding period for income calculation is 2 years from the offer date, not 1 year from the purchase date as it is for the long-term gains.

Assuming the stock went up between the offering date and the purchase date:
- if you held it for 2 years from the offering date, then you owe income tax on 15% of the price on the offering date. In this case, only the actual discount you received is considered income.
- if you held it for less than 2 years from the offering date, then you owe income tax on the difference between the price on the purchase date and the price you paid. In this case, the discount you received plus all gains during the offer period are treated as income.

This income will be reported on your W2 as wages in box 1, but it may or may not also be shown in box 14 or in an accompanying statement on your W2. You should get some paperwork by mail or e-mail lthat describes the transaction. Make sure to save it just in case your W2 doesn't have enough info to figure it out. You need to know the amount that's being treated as ordinary income because when you do your taxes you will add that amount to the basis shown on your 1099-B so that your long-term gains will be reduced. If you don't make this adjustment, then you'll end up paying both income tax and long term cap gains tax on the same money. Some brokerages will send you an extra statement at tax time that does the calcs for you, but not all of them do that, and you still have to know enough to read that statement and adjust the reported basis correctly on your tax return.

I understand the point of view that you should always sell ESPP shares on the first possible day to lock in the gain, but we always sold two years past the offer date to minimize the taxes. We only had a couple of times through the years where this would have meant taking a loss so we just held onto those shares until they were positive again.
Click to expand...

Right I know about the taxes. I get taxed on dividends too. Fidelity showed all long term gains as all the shares bought were 2+ years ago. The form will be there as 1099. I use the online tax software to do my Federal tax return. I suppose it will again do it for me in figuring out the taxes? I do report cost basis.
 
F.I.R.E User said:
I was eligible to sell 72 shares today. I did just that.

I took the long term capital gains of $1,860.88. With this money: I will either fund my Roth IRA at Fidelity on FZROZ or VTSAX taxable at Vanguard. What do you think I should do?
Click to expand...

Again? Really?

OK, I'll say it again:
Why do you think there is a correct answer to this question? What do you think you should do?
 
F.I.R.E User said:
Right I know about the taxes. I get taxed on dividends too. Fidelity showed all long term gains as all the shares bought were 2+ years ago. The form will be there as 1099. I use the online tax software to do my Federal tax return. I suppose it will again do it for me in figuring out the taxes? I do report cost basis.
Click to expand...

If you use online tax software and you make sure to tell it that these shares were ESPP shares, then it should ask you for the extra info it needs to do things correctly. For TurboTax, I'm pretty sure you have to use the Premier level, not Deluxe, to get the right interview questions. I think the Deluxe software won't even ask you if any of the sales were ESPP shares. (I haven't looked at it in a while, so that might have changed. Maybe someone who has the 2020 Deluxe TTax can confirm.)

The important thing to understand here is that the basis numbers that Fidelity gives you on the 1099-B will need to be adjusted upwards and it's on you to make sure that happens. The IRS doesn't know what your basis should be, and they won't send you a nice letter to tell you that you paid too much in taxes.
 
cathy63 said:
If you use online tax software and you make sure to tell it that these shares were ESPP shares, then it should ask you for the extra info it needs to do things correctly. For TurboTax, I'm pretty sure you have to use the Premier level, not Deluxe, to get the right interview questions. I think the Deluxe software won't even ask you if any of the sales were ESPP shares. (I haven't looked at it in a while, so that might have changed. Maybe someone who has the 2020 Deluxe TTax can confirm.)

The important thing to understand here is that the basis numbers that Fidelity gives you on the 1099-B will need to be adjusted upwards and it's on you to make sure that happens. The IRS doesn't know what your basis should be, and they won't send you a nice letter to tell you that you paid too much in taxes.
Click to expand...

No software ever has the questions of ESPP. I get the 1099-B from Fidelity and use those # to fill it in. I’ve only used the free file H&R Block online and last year I used free Robinhood. I can’t change cost basis # because I have to input what’s reported to the IRS.
 
F.I.R.E User said:
No software ever has the questions of ESPP. I get the 1099-B from Fidelity and use those # to fill it in. I’ve only used the free file H&R Block online and last year I used free Robinhood. I can’t change cost basis # because I have to input what’s reported to the IRS.
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You are using the wrong software. You have to use more advanced software to handle advanced transactions such as ESPP sales. None of the free versions I've seen can do it properly. For ESPP sales (or any other transaction where the 1099-B is incorrect) you are supposed to adjust the cost basis on form 8949. However, if you qualify for free file, it is possible that your income is low enough that all your long term gains are taxed at 0%. If that's the case, then even though you reported these sales incorrectly, you didn't actually pay more tax than you owe.

Read this Forbes article, especially mistake #3, for further info. https://www.forbes.com/sites/bruceb...mployee-stock-purchase-plans/?sh=d2a67ec2a9bc

3. Directly using what appears as the cost basis on your Form 1099-B. Under IRS rules, the Form 1099-B issued to you by your broker cannot report the compensation element as part of your cost basis. Only the purchase price will appear, and the basis does not need to be included for stock that was purchased before 2011. This means you must check the accuracy of the basis and make any necessary adjustments on Form 8949.

Alert: When compensation income is not part of the tax basis reported in Box 1e on Form 1099-B, make a gain or loss adjustment in column (g) of Form 8949, and enter code B in column (f), among other steps. Should Box 1e be blank, report the full basis in column (e).

See the section Reporting Company Stock Sales on the website myStockOptions.com for annotated diagrams of Form 8949 that show the proper tax-return reporting for sales of shares acquired from ESPPs, stock options, and restricted stock units.
Click to expand...

If you do have any long term gains from ESPP sales that were taxed in 2018, 2019 or 2020, you can still amend those returns and get the excess that you paid refunded to you.
 
cathy63 said:
You are using the wrong software. You have to use more advanced software to handle advanced transactions such as ESPP sales. None of the free versions I've seen can do it properly. For ESPP sales (or any other transaction where the 1099-B is incorrect) you are supposed to adjust the cost basis on form 8949. However, if you qualify for free file, it is possible that your income is low enough that all your long term gains are taxed at 0%. If that's the case, then even though you reported these sales incorrectly, you didn't actually pay more tax than you owe.

Read this Forbes article, especially mistake #3, for further info. https://www.forbes.com/sites/bruceb...mployee-stock-purchase-plans/?sh=d2a67ec2a9bc

If you do have any long term gains from ESPP sales that were taxed in 2018, 2019 or 2020, you can still amend those returns and get the excess that you paid refunded to you.
Click to expand...

My AGI has always been lower the max threshold that the free file offers. I think in the past all my gains from ESPP were taxed at 0% and I don’t have to file State tax because I live in Texas.

I also got Saver’s Credit.
 
TT handles ESPP relatively well. Yes you need the premier version. I tried other tax programs and they didn’t work as well. I’ll stick with TT until no ESPP, probably longer, even though it’d be nice to use deluxe.

Sure, there’s a tax benefit to holding long-term. But I look at the 15% as a benefit and extra income, so I didn’t care if it’s taxed at my income rate. Much better than holding long term and dealing with individual stock volatility.
 
tulak said:
TT handles ESPP relatively well. Yes you need the premier version. I tried other tax programs and they didn’t work as well. I’ll stick with TT until no ESPP, probably longer, even though it’d be nice to use deluxe.

Sure, there’s a tax benefit to holding long-term. But I look at the 15% as a benefit and extra income, so I didn’t care if it’s taxed at my income rate. Much better than holding long term and dealing with individual stock volatility.
Click to expand...

Free TT?
 
F.I.R.E User said:
What do you mean by again? I posted new info.
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Again. No one here knows "what you should do".

ESPP is very complex tax-wise. Even experienced CPA's can screw it up. You need to find a tax person who knows ESPP inside and out. I think maybe I missed my calling in that regard, but even so I only know the details of the ESPP's I have participated in, and they are all slightly different.

But please stop urping up questions like "With this money: I will either fund my Roth IRA at Fidelity on FZROZ or VTSAX taxable at Vanguard. What do you think I should do?" No one here has any idea what you should do.

Sincerely,
melman.
 
LarryMelman said:
Again. No one here knows "what you should do".

ESPP is very complex tax-wise. Even experienced CPA's can screw it up. You need to find a tax person who knows ESPP inside and out. I think maybe I missed my calling in that regard, but even so I only know the details of the ESPP's I have participated in, and they are all slightly different.

But please stop urping up questions like "With this money: I will either fund my Roth IRA at Fidelity on FZROZ or VTSAX taxable at Vanguard. What do you think I should do?" No one here has any idea what you should do.

Sincerely,
melman.
Click to expand...

So what is different about ESPP than holding the same stock outside of ESPP?
 
LarryMelman said:
That means nothing. You or your CPA need to know whether it's correct. One of my ESPP's was handled by E-trade and their 1099 was missing the basis adjustments that were described in comment 27.
Click to expand...

I’ve never used a CPA or a tax professional in my life. Is it worth it?

Cost basis is listed in the form and reports to IRS.
 
F.I.R.E User said:
I’ve never used a CPA or a tax professional in my life. Is it worth it?

Cost basis is listed in the form and reports to IRS.
Click to expand...

Is it worth it to do your taxes correctly? Only you can answer this.

The cost basis that Fidelity reports to the IRS is wrong. The IRS knows that this number is wrong and they have provided a way for you to report the correct number on form 8949. You can do that by buying software that handles this situation correctly, by having a professional do your taxes, or by filling out the forms by hand.

However, if your income is below $52.5K (below $105K if you are married), then you don't have to pay cap gains tax on these sales anyway and adjusting the cost basis won't make any difference to your taxes owed. So you'd be spending money on the software or a tax preparer and not saving any money on your taxes.

If you are earning more than the above amounts, then your taxes would be lower if you did them right. It's hard to say if you'd save enough to make it worth paying to do them though.
 
cathy63 said:
Is it worth it to do your taxes correctly? Only you can answer this.

The cost basis that Fidelity reports to the IRS is wrong. The IRS knows that this number is wrong and they have provided a way for you to report the correct number on form 8949. You can do that by buying software that handles this situation correctly, by having a professional do your taxes, or by filling out the forms by hand.

However, if your income is below $52.5K (below $105K if you are married), then you don't have to pay cap gains tax on these sales anyway and adjusting the cost basis won't make any difference to your taxes owed. So you'd be spending money on the software or a tax preparer and not saving any money on your taxes.

If you are earning more than the above amounts, then your taxes would be lower if you did them right. It's hard to say if you'd save enough to make it worth paying to do them though.
Click to expand...

As discussed earlier, if my tax liability is $0 then it won’t matter right? My taxable salary is $60k but AGI gets well below $52.5k because of pre tax benefits, deductions and credits.
 
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