Employees buy company stock, might pay taxes: IRS Form 3922
September 14, 2023A Guide to IRS Form 3922
IRS Form 3922 is a tax form that you may receive from your employer if you participated in an employee stock purchase plan (ESPP) during the year. An ESPP is a benefit that allows you to buy shares of your company’s stock at a discounted price, usually through payroll deductions. In this article, we will explain what Form 3922 is, how it affects your taxes, and what you need to do with it.
Here is a table of contents with links to help you navigate this article:
- What is Form 3922?
- How does Form 3922 affect your taxes?
- How to report Form 3922 on your tax return
- Common questions about Form 3922
- Need Specialized Help with Form 3922?
What is Form 3922?
Form 3922 is a document that your employer sends to the IRS and to you if you purchased shares of your company’s stock through an ESPP during the year. The form shows the following information:
| Date of grant | The date when your employer granted you the option to buy the shares |
| Date of exercise | The date when you actually bought the shares |
| Fair market value (FMV) per share on grant date | The value of one share of your company’s stock on the date of grant |
| Fair market value (FMV) per share on exercise date | The value of one share of your company’s stock on the date of exercise |
| Number of shares transferred | The number of shares that you bought through the ESPP |
| Exercise price paid per share | The price that you paid for each share, which is usually lower than the FMV on the grant date or the exercise date |
| Exercise price per share determined as if the option was exercised on the grant date | The hypothetical price that you would have paid for each share if you had exercised the option on the grant date, which is usually equal to the FMV on the grant date or lower |
How does Form 3922 affect your taxes?
Form 3922 does not directly affect your taxes, but it provides information that you need to calculate your taxable income and capital gains or losses when you sell the shares that you bought through the ESPP. The tax treatment of your ESPP shares depends on two factors: the holding period and the disposition type.
The holding period is the length of time that you keep the shares before selling them. There are two types of holding periods: qualifying and disqualifying. A qualifying holding period means that you meet both of these conditions:
- You sell the shares at least two years after the grant date
- You sell the shares at least one year after the exercise date
A disqualifying holding period means that you do not meet one or both of these conditions.
The disposition type is the way that you sell the shares. There are two types of dispositions: qualifying and disqualifying. A qualifying disposition means that you sell the shares after meeting the qualifying holding period. A disqualifying disposition means that you sell the shares before meeting the qualifying holding period or under certain circumstances, such as death, disability, or divorce.
The tax consequences of your ESPP shares depend on whether you have a qualifying or disqualifying disposition. Here are some examples based on data from 2023:
| Example | Grant Date | Exercise Date | Sale Date | Holding Period | Disposition Type |
|---|---|---|---|---|---|
| Alice | Jan 1, 2023 | Jun 30, 2023 | Dec 31, 2023 | Disqualifying | Disqualifying |
| Bob | Jan 1, 2023 | Jun 30, 2023 | Jul 1, 2024 | Qualifying | Disqualifying |
| Carol | Jan 1, 2023 | Jun 30, 2023 | Jan 2, 2025 | Qualifying | Qualifying |
| Dave | Jan 1, 2023 | Jun 30, 2023 | Jan 2, 2025 | Qualifying | Qualifying |
In a disqualifying disposition, you have to report two types of income on your tax return:
- Ordinary income: This is the difference between the FMV of the shares on the exercise date and the exercise price that you paid. This amount is added to your wages on your Form W-2 and is subject to income tax and payroll tax.
- Capital gain or loss: This is the difference between the sale price of the shares and the FMV of the shares on the exercise date. This amount is reported on Schedule D and Form 8949 and is subject to capital gains tax. The capital gain or loss can be short-term or long-term depending on how long you held the shares after the exercise date.
In a qualifying disposition, you have to report only one type of income on your tax return:
- Capital gain or loss: This is the difference between the sale price of the shares and the exercise price that you paid. This amount is reported on Schedule D and Form 8949 and is subject to capital gains tax. The capital gain or loss is always long-term because you met the qualifying holding period.
In some cases, you may also have to report a small amount of ordinary income if the sale price of the shares is lower than the FMV of the shares on the grant date. This is called a bargain element and it is added to your wages on your Form W-2 and is subject to income tax and payroll tax.
Need extra help? Ask a professional.
How to report Form 3922 on your tax return
To report Form 3922 on your tax return, you need to keep track of the following information for each ESPP transaction:
- The grant date, exercise date, and sale date of your shares
- The FMV of your shares on the grant date and the exercise date
- The exercise price that you paid for your shares
- The sale price of your shares
- The number of shares that you bought and sold
- The holding period and disposition type of your shares
- The amount of ordinary income and capital gain or loss that you realized from your shares
- The cost basis of your shares for capital gains tax purposes
You can look at an example with numbers here.
You can use Form 3922 as a starting point to calculate these amounts, but you may also need to refer to other documents such as your ESPP enrollment form, your brokerage statements, and your Form W-2. You can also use online tools such as TaxAct, TurboTax, or H&R Block to help you with the calculations and reporting.
Common questions about Form 3922
Do I have to pay taxes when I receive Form 3922?
No, you do not have to pay taxes when you receive Form 3922. You only have to pay taxes when you sell the shares that you bought through the ESPP.
The amount and type of taxes that you have to pay depend on how long you hold the shares and whether you meet the holding period requirements. The holding period requirements are:
- You must hold the shares for at least one year after the date of purchase, and
- You must hold the shares for at least two years after the date of grant.
If you meet the holding period requirements, you will have a qualified disposition. This means that you will pay ordinary income tax on the lesser of:
- The discount that you received when you bought the shares, or
- The gain that you realized when you sold the shares.
You will also pay capital gains tax on any additional gain that exceeds the ordinary income portion.
If you do not meet the holding period requirements, you will have a disqualifying disposition. This means that you will pay ordinary income tax on the difference between:
- The fair market value of the shares on the date of purchase, and
- The price that you paid for the shares.
You will also pay capital gains tax on any additional gain or loss that results from selling the shares.
Do I have to report Form 3922 on my tax return if I did not sell my shares?
No, you do not have to report Form 3922 on your tax return if you did not sell your shares. You only have to report Form 3922 on your tax return if you sold your shares in 2023.
Example : How do I report Form 3922 on my tax return if I sold my shares?
If you sold your shares in 2023, you have to report Form 3922 on your tax return. You will need to use Form 8949 and Schedule D to report your capital gains or losses from selling the shares. You will also need to report your ordinary income from the sale on Form 1040, line 7.
Here are some examples of how to report Form 3922 on your tax return, depending on whether you had a qualified or a disqualifying disposition:
Example 1: Qualified disposition
You received a grant of 100 shares on 01/01/2023, when the fair market value of the stock was $10. You purchased the shares on 06/30/2023, when the fair market value of the stock was $15. You paid $8.50 per share, which was a 15% discount from the price determined as if the option was exercised on the date of grant. You sold the shares on 07/01/2024, when the price was $20 per share.
The tax consequences of this transaction are as follows:
Ordinary income tax: You have to pay ordinary income tax on the lesser of the discount that you received when you bought the shares, or the gain that you realized when you sold the shares. In this case, the discount was $150 (($10 – $8.50) x 100) and the gain was $1,150 (($20 – $8.50) x 100). Therefore, you have to report $150 as ordinary income on Form 1040, line 7.
Capital gains tax: You have to pay capital gains tax on the additional gain that exceeds the ordinary income portion. In this case, the additional gain was $1,000 (($20 – $10) x 100). Since you held the shares for more than one year, this is a long-term capital gain and it is taxed at preferential rates. You have to report this gain on Form 8949 and Schedule D.
Example 2: Disqualifying disposition
You received a grant of 100 shares on 01/01/2023, when the fair market value of the stock was $10. You purchased the shares on 06/30/2023, when the fair market value of the stock was $15. You paid $8.50 per share, which was a 15% discount from the price determined as if the option was exercised on the date of grant. You sold the shares on 12/31/2023, when the price was $18 per share.
The tax consequences of this transaction are as follows:
Ordinary income tax: You have to pay ordinary income tax on the difference between the fair market value of the shares on the date of purchase and the price that you paid for the shares. In this case, the difference was $650 (($15 – $8.50) x 100). You have to report this amount as ordinary income on Form 1040, line 7.
Capital gains tax: You have to pay capital gains tax on the additional gain that exceeds the ordinary income portion. In this case, the additional gain was $300 (($18 – $15) x 100). Since you held the shares for less than one year, this is a short-term capital gain and it is taxed at ordinary rates. You have to report this gain on Form 8949 and Schedule D.
As you can see, the tax treatment of your ESPP shares depends on several factors, such as the length of time you hold the shares, the discount rate, and the price fluctuations of the stock. You should keep track of your Form 3922 and any other documents related to your ESPP transactions, such as purchase confirmations and sale receipts. You should also consult a tax professional if you have any questions or concerns about reporting your ESPP income and gains.
Need Specialized Help with Form 3922?
At Bottomline Tax, we want to give our readers the best information we can compile, however your specific situation as a taxpayer may exceed the contents of this article. We always recommend readers consult a tax professional in case of unresolved questions.
