Selling ESPP for a loss - tax implications when stock price falls below purchase price

Wait I'm still confused. If they bought at $7.28 and are selling at $7.69, isn't that a gain? Why would the cost basis be $8.56 if they didn't actually pay that much? And would this be different if they'd held the shares longer?

The confusion comes from how ESPP taxation works. While you physically paid $7.28, for tax purposes, the $1.28 discount is considered compensation income (like part of your salary). Your actual cost basis becomes the full FMV ($8.56) because you're already being taxed on the discount separately. This prevents double taxation. So economically, you're up $0.41 per share, but tax-wise, you have both ordinary income (the discount) and a capital loss (selling below FMV). And yes, holding period matters significantly. If this was a qualifying disposition (generally held at least 1 year from purchase and 2 years from offering date), you might have different tax treatment. For non-qualifying dispositions, the entire discount is ordinary income regardless of the selling price.

How accurate was it though? My tax guy charges me like $75 extra just to deal with my ESPP sales and says it's complicated. Does this actually work for complicated scenarios like if you have multiple purchase dates and some qualifying/non-qualifying dispositions?

I'm skeptical of these tax tools. Did it handle the AMT implications if there were any? And what about wash sale rules if you bought more shares within 30 days before or after selling at a loss?

It was extremely accurate - I actually compared it with what my accountant did the previous year and it matched exactly. The tool correctly identified both the ordinary income component and the capital gain/loss for each lot of shares. For multiple purchase dates, it handles them perfectly - that's actually where it shines. It separates each lot with the correct purchase date, holding period, and tax treatment. It clearly labels which dispositions are qualifying vs non-qualifying based on your holding period. The system does handle AMT implications for ISO exercises (though that's more relevant for options than ESPP). And yes, it flags potential wash sale issues if you've bought similar securities within the 30-day window. It even creates the specific adjustments needed for your cost basis in those cases. The reports are really comprehensive.

How does this even work? I've spent literal days of my life on hold with brokers and tax people. There's no way you can just pay to skip the line... right?

This sounds like a scam. If it were possible to skip phone queues, everyone would do it. They probably just keep you on hold while they're also on hold, then connect you when they finally get through.

It's not like a magical line-cutting service. The way it works is they use technology to navigate phone trees and wait on hold for you. When a real person answers, you get a call connecting you with that rep. So you're not skipping the line - they're just waiting in it so you don't have to. It really does work though. I called eTrade directly three times and spent at least 45 minutes on hold each time before giving up. With this service, I got a call back in about 15 minutes when they reached a rep. Totally worth it if you value your time.

Thanks, that's a really good point. I just checked my W-2 and I don't see anything in Box 12 related to the ESPP discount. Would this definitely be there if they reported it correctly? The shares were purchased in June 2024 and I'm selling now in January 2025, so I think it's a non-qualifying disposition.

Yes, for a non-qualifying disposition that discount amount should typically be reported on your W-2. Since you purchased in June 2024 and are selling in January 2025 (less than 1 year), this is definitely a non-qualifying disposition. If it's not on your 2024 W-2, there are two possibilities: either your employer will include it on your 2025 W-2 (since that's when you're selling), or they might have made a reporting error. I'd recommend contacting your former employer's payroll department to clarify how they're handling the reporting. Better to sort this out now than get a notice from the IRS later!

TurboTax Premium handles ESPPs but you have to input everything manually and carefully. The import feature from brokerages often messes up the cost basis for ESPP shares. I had to delete all the imported transactions and re-enter them with the correct information. Tedious but it worked.

This is such a helpful way to think about it! I've been struggling to wrap my head around why I'd owe taxes on a "loss" but your explanation makes it click. So essentially the IRS is saying "we're going to tax you on that $1.28 discount as if it was a bonus, and then treat everything else as a separate investment transaction." Quick question though - do you know if there's any difference in how this gets reported if the shares were purchased through payroll deduction vs. a lump sum purchase? I've been doing the payroll deduction method and wondering if that changes anything for record-keeping purposes.