Employee Stock Purchase Plan (ESPP): How U.S. Taxpayers Are Taxed

Upbeat music plays throughout.

Onscreen text: Employee Stock Purchase Plan (ESPP): How U.S. Taxpayers Are Taxed

Female narrator: With an Employee Stock Purchase Plan, decisions you make about your shares affect your taxes.

A woman sits on a park bench and uses her laptop.

Narrator: You might be wondering things like, "Do I owe taxes on my shares? When do taxes come into play? Or what happens when I sell?"

Speech bubbles appear above her, with a question in each one.

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Do I owe taxes on my shares? When do taxes come into play? What happens when I sell?

The speech bubbles fade away.

Narrator: The taxes you owe will depend on . . .

The scene fades to a gray background and a calendar icon in a red circle appears next to a money icon, with a plus sign between the two icons.

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Time + Profit or Loss

Narrator:  . . . how long you've held your shares and the profit you make or the loss you incur.

The two red circles move toward each other to form one circle with new text in it.

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Purchase Date: No taxes applied

Narrator: When you bought your shares at a discount using your ESPP contributions, there were no taxes applied at purchase.  

A line draws out from the bottom of the circle and comes to an icon of a certificate.

Narrator: When you do sell your shares, it's tax reportable. And there are two elements of taxes involved: ordinary income that's reported on your W2 and capital gains or losses.

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Sale of shares
Tax reportable:
Ordinary income
Capital gains or losses

Narrator: You'll also come across the terms "qualifying disposition" and "disqualifying disposition."

Two lines draw out from the sides of the certificate icon and end at circles, each with a term inside it.

Onscreen text:
Qualifying disposition
Disqualifying disposition

Between the two circles is a rectangular box with text inside it.

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You don't have to guess. Your ESPP shares will be labeled in the Equity Award Center.

An arrow on the left edge of the box points to the circle that says "Qualifying disposition."

Narrator: Your shares qualify for a favorable tax treatment . . .

An arrow on the right edge of the box points to the circle that says "Disqualifying disposition."

Narrator: . . . or disqualify, depending on how long you've held them.

The word "disposition" jumps forward briefly.

Narrator: The word "disposition" is just another way of saying you're selling—or disposing of—your shares.

A line extends down from the circle on the left to a box with a check mark and text in it. That circle and box become larger and move to the center of the screen.

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Meets both holding periods
Usually taxed more favorably

Narrator: A qualifying disposition is when shares are held for the length of both IRS-required holding periods and means, in most cases, they'll receive the more favorable tax treatment.

The view pans to the right where the circle that says "Disqualifying disposition" and a box with an "X" and copy in it comes into view.

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Does not meet both holding periods
Not taxed more favorably

Narrator: A disqualifying disposition is when shares are not held for the required holding periods and means they won't receive the more favorable tax treatment.

The view pans left, back to the circle and the box with a check mark and text in it. A line then extends down from the box to a timeline with a label above it. The timeline features four points in time: Offering date, Purchase date, Year 1, Year 2.

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Qualifying Disposition Holding Period
Offering date
Purchase date
Year 1
Year 2

Narrator: To be considered a qualifying disposition and receive favorable tax treatment, shares must meet two holding periods.

On the timeline, the dot above "Purchase date" turns red, the line from there to "Year 1" turns red, and then the dot above "Year 1" turns red.

Narrator: The day they're sold must be more than one year from the purchase date . . .

On the timeline, the dot above "Offering date" and the dot above "Year 2" turn red, and the full length of the line turns red.

Narrator: . . . and more than two years from the offering date. For more detailed information, refer to our ESPP tax guide at eac.schwab.com.

The timeline fades away and moves left as the screen pans to the right. A dotted red line with an arrow moves to the right across the screen until it reaches a white box with text in it.

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ESPP Tax Forms

Narrator: There are three tax forms related to your ESPP that you'll need when you file your taxes.

A line moves downward from the white box and splits into three lines, each leading to a box with an icon and text in it. Each icon has the name of a tax form on it and the source of the form below it.

Onscreen text: 
Form 3922 
from Schwab or your company

W-2
from your company

1099-B
from Schwab

Each icon becomes larger for a moment as it is described.

Narrator: You'll receive Form 3922 from Schwab or your company in the year you purchased ESPP shares. In the years you sell, your W2 will report the ordinary income information. And the 1099-B from Schwab reports all your sales, which you'll need to calculate any capital gains or losses.

The icons fade into the distance, and the woman on the park bench again comes into view. She is talking on her cellphone.

Narrator: There's a lot to consider in selling shares. Talking with a qualified tax professional will help you make decisions that are best for you.

A white screen with grey text slides in from the right.

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Still have questions? 
Find more information at eac.schwab.com.

Narrator: Still have questions? Visit the Equity Award Center for more tax resources.

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Still have questions? 
800-654-2593 
Monday through Friday, 24 hours a day.

Narrator: Or give us a call.

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FOR GENERAL INFORMATIONAL PURPOSES ONLY.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, legal advisor, or investment manager.
Stock Plan Services provides equity compensation plan services and other financial services to corporations and employees through Charles Schwab & Co., Inc. ("Schwab"). Schwab, a registered broker-dealer, offers brokerage and custody services to its customers. 
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