I purchased stock from my employer under a § 423 employee stock purchase plan and received a Form 1099-B for selling it. How do I report this?

When you purchase stock from your employer under a § 423 employee stock purchase plan and subsequently sell it, you need to report the transaction on your tax return. Here is a step-by-step guide on how to report this:

1. Determine the Holding Period:
   • You need to determine if you meet the holding period requirement. The holding period requirement is met if you do not sell the stock until the end of the later of:
     • The 1-year period after the stock was transferred to you, or
     • The 2-year period after the option was granted.
2. Reporting the Sale:
   • If you meet the holding period requirement:
     • Generally, you can treat the sale of the stock as giving rise to capital gain or loss.
     • You may have ordinary income if the option price was below the stock's fair market value (FMV) at the time the option was granted. The ordinary income is the lesser of:
       1. The amount by which the stock's FMV on the date of grant exceeds the option price, or
       2. The amount by which the stock's FMV on the date of sale or other disposition exceeds the purchase price.
     • Report this ordinary income as wages on line 1a of Form 1040 or Form 1040-SR. Your employer should report this income to you as wages in box 1 of Form W-2. If your employer does not provide a Form W-2 or the Form W-2 does not include the income in box 1, report the income on line 8k of Schedule 1 (Form 1040).
   • If you do not meet the holding period requirement:
     • The ordinary income to report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the purchase price.
     • Treat any additional gain or loss as capital gain or loss.
3. Using Form 1099-B:
   • You should have received a Form 1099-B from the broker reporting the sale of the stock. Use this form to complete Form 8949 and/or Schedule D (Form 1040).
   • Report the proceeds shown in box 1d of Form 1099-B in column (d) of either Part I or Part II of Form 8949, whichever applies.
   • Include in column (g) any selling expenses or option premiums not reflected in box 1d or box 1e of Form 1099-B. If you include a selling expense in column (g), enter “E” in column (f).
   • Enter the basis shown in box 1e in column (e). If the basis shown on Form 1099-B is not correct, see the instructions for Form 8949 for the adjustment you must make. If no basis is shown on Form 1099-B, enter the correct basis of the property in column (e).
4. Form 8949 and Schedule D:
   • Use Form 8949 to report the sale or exchange of a capital asset not reported on another form or schedule.
   • Report short-term gains or losses in Part I and long-term gains or losses in Part II of Form 8949.
   • Use Schedule D (Form 1040) to report the overall gain or loss from transactions reported on Form 8949.
5. Additional Documentation:
   • You should receive a Form 3922 from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.

By following these steps, you can accurately report the sale of stock purchased under a § 423 employee stock purchase plan on your tax return.

Sources:
§ 423. Employee stock purchase plans
Publication 525 (2023)
Publication 550 (2023)
Instructions for Form 1099-B (2023)
Publication 15-B (2024)