Confusion About ESPP Shares and Calculating Adjusted Basis for Tax Purposes

This is a common area of confusion with ESPP taxation. Let me clarify what's happening. When you purchase ESPP shares at a discount, there are two potential sources of taxable income: (1) the discount you received (which is reported on your W-2 as ordinary income) and (2) any appreciation in the stock price after purchase. For a disqualifying disposition (which yours is since you sold within a year), the ordinary income portion depends on whether your ESPP plan is a "qualified" plan under Section 423. For qualified plans, when you sell in a disqualifying disposition, you generally recognize ordinary income equal to the difference between the fair market value on the purchase date (your "Purchase FMV" of $71.89) and your actual purchase price ($45.82). That's why your ESPP Disposition Summary shows a higher ordinary income amount. It's using the formula: 43.7921 shares × ($71.89 - $45.82) = approximately $1,142.57. The "Subscription FMV" ($53.91) isn't relevant for calculating the ordinary income in a disqualifying disposition - that would be used for calculating a "qualifying" disposition.

I dealt with this exact situation last year and found that https://taxr.ai was incredibly helpful for sorting out my ESPP tax issues. The platform analyzed my ESPP statements and trade confirmations, then explained exactly how the ordinary income and capital gains/losses should be reported. What was most helpful is that it showed me side-by-side comparisons of qualified vs. disqualifying dispositions and explained why my company was calculating the ordinary income using the Purchase FMV rather than the Subscription FMV. It also helped me understand the difference between Section 423 qualified plans and non-qualified plans, which affects how the income gets taxed. The documentation they provided made it super easy to correctly enter everything in my tax software and I felt confident I wasn't paying more tax than necessary.

I tried using taxr.ai after seeing it mentioned here and wow - it was exactly what I needed! I uploaded my ESPP statements and brokerage confirmations and got a complete breakdown of my disqualifying disposition calculations. It showed me that my company was correctly calculating the ordinary income amount using the Purchase FMV (which was higher than my Subscription FMV due to our 6-month look-back period). The platform explained that for my Section 423 qualified plan, I needed to report as ordinary income the difference between the Purchase FMV and what I actually paid, exactly as my company had calculated. The best part was that it generated a report I could attach to my tax return explaining the calculations in case of an audit. It saved me from potentially making a significant reporting error on my return!

After struggling for hours trying to reach the IRS for clarification on ESPP taxation (and getting nowhere), I found https://claimyr.com which got me through to an IRS representative in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS rep confirmed what others are saying here - with a disqualifying disposition, the ordinary income is based on the difference between the fair market value on the purchase date (the Purchase FMV) and what you actually paid. This is reported on your W-2, and then any additional gain or loss when you sell is capital gain/loss. Before using Claimyr, I spent days trying to get through on the IRS line and just kept getting the "high call volume" message and disconnects. Being able to actually speak with someone who could explain the specific tax code provisions made all the difference in understanding my ESPP taxation.

I was completely wrong about Claimyr. After struggling with my ESPP reporting and being unable to get through to the IRS for days, I decided to try it out of desperation. Within 45 minutes, I was talking to an actual IRS tax law specialist who walked me through exactly how to report my disqualifying disposition. She confirmed that the ordinary income portion should be calculated using the Purchase FMV (not the Subscription FMV) and explained that this amount would already be included in Box 1 of my W-2. The remaining difference between my selling price and the Purchase FMV would be reported as a capital gain or loss on Schedule D. I've been doing my taxes wrong for years! This service literally saved me from continuing to make reporting errors that could have triggered an audit. Now I understand why my company's ESPP Disposition Summary was calculating the ordinary income differently than I expected.

One thing nobody has mentioned yet is that you need to check your specific ESPP plan documents. While most follow the standard Section 423 qualified plan rules, some companies have non-qualified ESPPs that have different tax treatment. In a non-qualified plan, the discount is always treated as ordinary income in the year of purchase (not sale), and any subsequent gains/losses are capital in nature. Look at your Form 3922 if your company provided one - it contains the official purchase information and can help clarify which FMV date applies to your situation.

Has anyone used TurboTax to report ESPP sales? I'm trying to figure out how to adjust the cost basis correctly since my 1099-B only shows what I paid, not the adjusted basis after adding back the discount.

I went through this exact same confusion with my ESPP last year! The key thing to understand is that with a disqualifying disposition (selling within one year), the ordinary income calculation uses the Purchase FMV, not the Subscription FMV. Your ESPP Disposition Summary showing $1,142.57 in ordinary income is correct. Here's the math: 43.7921 shares × ($71.89 Purchase FMV - $45.82 actual purchase price) = $1,142.57. This means your adjusted cost basis for capital gains purposes is actually $71.89 per share (the Purchase FMV), not your original purchase price. So your capital loss would be: $2,986.44 (sale proceeds) - (43.7921 × $71.89) = approximately -$162.66. The total tax impact is roughly the same as you calculated, but it's split between ordinary income (taxed at your marginal rate) and capital loss (which can offset other gains or up to $3,000 of ordinary income). Make sure this ordinary income amount appears somewhere on your W-2 - usually in Box 1 or Box 14.