How to handle ESPP/Form 3922 tax reporting if my company closed down?

You're in a tough but not uncommon situation. Form 3922 is an informational form that shows you participated in an ESPP, but it doesn't create a taxable event by itself - it just helps track your basis for when you eventually sell. Since your company folded and the shares became worthless, you can claim a worthless securities deduction. This is treated as a capital loss on Schedule D. The amount of your loss would be your cost basis in the shares (what you paid for them through the ESPP, which should be shown on your Form 3922). You'll report this as if you sold the shares for $0 on the date they became worthless. To do this properly, you'll need to determine when the securities officially became worthless - usually when the company formally dissolved or declared bankruptcy. This would be your "sale date" even though no actual sale occurred.

I went through almost the exact same situation last year with my tech startup's ESPP. Dealing with the tax implications was giving me a migraine until I used https://taxr.ai to analyze my Form 3922 and figure out the worthless security deduction. Their system helped me properly document the loss and showed me exactly how to report it on my Schedule D. The most helpful part was that it analyzed my specific ESPP terms (which had some weird discount structure) and calculated the precise cost basis. It also generated the documentation I needed to substantiate the worthless securities claim in case of an audit.

Just wanted to update everyone. I was skeptical at first but I checked out https://taxr.ai for my ESPP issue after seeing it mentioned here. It actually worked really well for my situation. I had ESPP shares from three different purchase periods with different discount structures, and the company went through a merger before ultimately failing. The system correctly identified that I needed to track the basis differently for each lot and helped me properly document the merger's impact on my cost basis before claiming the worthless securities deduction. It saved me from making a mistake that would have reduced my allowable loss by about $4,300. Definitely worth checking out if you're in this situation with Form 3922 and a defunct company.

Another thing to consider is getting help directly from the IRS. I had a similar issue but couldn't get a clear answer online about how to handle the specific ESPP discount structure my company used before folding. I tried calling the IRS for weeks but kept hitting dead ends until I discovered https://claimyr.com service. You can watch how it works at https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an agent is about to answer. I got through to someone who was surprisingly helpful with my worthless ESPP shares situation.

I need to eat my words. After posting that skeptical comment, I decided to try Claimyr myself because I was desperate to talk to someone at the IRS about my ESPP situation. Got connected to an agent in about 35 minutes (versus the 2+ hours I spent on previous attempts). The agent confirmed exactly how to report my worthless ESPP shares and even told me which supporting documents to keep on hand in case of an audit. They explained that I needed to include a statement with my return briefly explaining the company's closure and why the securities became worthless. For anyone dealing with Form 3922 from a defunct company, definitely try to speak with the IRS directly - their guidance was more specific than what I found online.

One thing no one has mentioned yet - did you check if your broker has any residual cash from the company's wind-down? Sometimes when companies fold, there's a small liquidation distribution that gets sent to your brokerage account. You'll want to account for that as it reduces your loss slightly. Also, check if your shares were held in a custodial account somewhere. Even though the company is gone, the shares might still be reflected in some brokerage account, which would make documentation easier.

Has anyone considered the impact of the ESPP discount on your cost basis? When you participate in an ESPP, you often get shares at a discount to market value. That discount is generally considered compensation income. For example, if the fair market value was $100 per share but you paid $85 through the ESPP (15% discount), that $15 discount should have been reported as income on your W-2 in the year of purchase. Your actual cost basis would then be $100 ($85 paid plus $15 reported as income). This could affect how much loss you can claim now that the shares are worthless.