ESPP Tax Consequences When Stock Price Drops Between Offer and Purchase Dates - Help?

Thanks for the explanation! So if I understand correctly, even if the stock drops 30% between offer and purchase, but I still get the 15% discount off the purchase price, I'm only taxed on that 15% discount amount if I sell right away? And what if the stock keeps dropping after purchase and I sell at a loss? Do I still owe taxes on the discount?

You're exactly right about being taxed on just the 15% discount if you sell immediately. That discount is considered compensation income regardless of what happens to the stock price. If you purchase the stock with the discount and then the price continues to drop before you sell, you'll still owe ordinary income tax on the discount you received at purchase. However, you would also realize a capital loss on the difference between your purchase price (after discount) and your lower sale price. This capital loss can offset other capital gains or up to $3,000 of ordinary income per year, with any excess carried forward to future tax years.

How does taxr.ai handle the lookback provision? My company ESPP uses lookback (lower of start/end of offering period), and I've never been sure if I'm calculating the discount right for tax purposes when prices fall during the offering period.

Is it actually worth the cost? My tax situation with ESPPs is complicated because I've had some qualifying and some disqualifying dispositions in the same year, plus some shares where the price tanked after purchase. Been thinking about getting help but not sure if these AI tools actually understand the nuances.

For lookback provisions, it analyzes both the beginning and ending offering period prices to determine the correct discount calculation. It actually explains which price was used as the reference point and why, which was super helpful for me. The value was definitely there for me. It handled my mixed qualifying and disqualifying dispositions perfectly, even identifying where my brokerage forms were reporting things incorrectly. It even showed me how to properly claim a loss on shares where the price dropped after purchase while still accounting for the discount income.

Wait, how does this actually work? They somehow get you through the IRS phone system faster? I've been trying to get clarification on ESPP reporting for weeks and keep getting disconnected after waiting for an hour.

Yeah right. There's no way to "skip the line" with the IRS. This sounds like a scam to me. The IRS phone lines are a disaster by design - they're understaffed and overwhelmed. No service can magically get you through faster than anyone else.

It's actually a callback system. They have automated tech that navigates the IRS phone tree and holds your place in line, then when they reach an agent, they call you and connect you. You don't have to wait on hold yourself. They really did get me through to a specialist who answered my ESPP tax questions. The agent explained that even when the stock price drops between offer and purchase, the discount is still calculated based on the fair market value on purchase date, not the higher offer date price. Made a huge difference in how I needed to report it.

What about the AMT implications? I've heard that can be a factor too, especially for qualifying dispositions when prices fall after purchase. Does AMT still apply in that case?

AMT generally isn't a concern for ESPP transactions unless you're dealing with qualifying dispositions where you had a significant discount. For qualifying dispositions, only the portion of your gain attributable to the discount might be subject to AMT adjustment. If prices fall after purchase and you have a qualifying disposition, you would still calculate the ordinary income portion based on the lesser of: the actual discount at purchase, or the gain from sale. If you sell at a loss, the ordinary income component would be zero since there's no gain, so there's no AMT impact either. The declining price actually helps avoid AMT issues in qualifying dispositions.

TurboTax struggled with my ESPP sales last year. It kept calculating my basis wrong because it didn't properly account for the discount when the stock price had fallen between offer and purchase. I had to manually override some of the calculations. The "step-by-step" interview doesn't handle this scenario well.

This is exactly the clarification I needed! I'm in a similar situation where our stock dropped about 22% between offer and purchase dates. Your example really helps me understand that the tax implications are actually better when the stock falls before purchase since the discount is calculated off the lower purchase price. One follow-up question - when you mention keeping detailed records of Form 3922, what specific information should I be tracking? My brokerage statement seems to match what my employer reported, but I want to make sure I'm not missing anything that could cause problems later when I file my taxes. Also, did your tax professional recommend any specific timing strategies for when to sell ESPP shares in volatile markets like this? I'm torn between taking the immediate discount benefit versus potentially qualifying for long-term capital gains treatment if the stock recovers.

Great questions! For Form 3922 record keeping, make sure you track: the offering period dates, fair market value on both offer and purchase dates, your actual purchase price, and number of shares purchased. Sometimes employers make mistakes on these forms, especially with lookback provisions when prices are volatile. The key discrepancy to watch for is if your brokerage reports your cost basis incorrectly on Form 1099-B - they sometimes don't account for the ESPP discount properly, which could lead to double taxation if you're not careful. Regarding timing strategy, my tax pro's advice was to consider your overall tax situation. If you're in a high tax bracket this year, holding for qualifying disposition treatment might make sense even with market volatility risk. But if you need the cash or are worried about further price drops, taking the immediate discount and paying ordinary income tax on just that $6 (in my example) isn't terrible. The bird-in-hand approach often wins with volatile stocks. One thing to consider: if you do hold and the stock continues dropping, you could end up with a qualifying disposition that has zero ordinary income (since there's no gain) but gives you a capital loss to offset other gains. That's actually not a bad outcome tax-wise!

This is really enlightening! I had no idea that the lookback provision could work so favorably when stock prices are volatile. Your example with the mid-period dip to $45 being used as the reference price is exactly the kind of scenario I was confused about. I'm curious - how did you track which price your company actually used for the discount calculation? Did they provide clear documentation, or did you have to dig into the details yourself? I want to make sure I'm calculating my potential tax liability correctly before my next purchase period closes. Also, when you sold immediately after purchase, did you run into any issues with your brokerage correctly reporting the basis on Form 1099-B? I keep seeing warnings about brokerages not handling ESPP cost basis properly, especially in volatile market conditions.