Tax reporting of donation of ESPP shares

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MathIsMyWayr
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Tax reporting of donation of ESPP shares

Post by MathIsMyWayr »

I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
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FIREchief
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Re: Tax reporting of donation of ESPP shares

Post by FIREchief »

MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
Are they all long term shares? Why do you think purchase price will matter? While you *may* be asked by the IRS to provide basis information, the deductible amount of long term shares is based solely upon market value upon donation. See my signature.

(or, are you referring to purchase options?)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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MathIsMyWayr
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Re: Tax reporting of donation of ESPP shares

Post by MathIsMyWayr »

FIREchief wrote: Tue Aug 25, 2020 5:18 pm
MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
Are they all long term shares? Why do you think purchase price will matter? While you *may* be asked by the IRS to provide basis information, the deductible amount of long term shares is based solely upon market value upon donation. See my signature.

(or, are you referring to purchase options?)
Gains are all long term. If I sell ESPP shares, the purchase price is the basis, gains are subject to LTCG taxes and the discount becomes an ordinary income. Discount is like a deferred income. Am I still on the hook for the discount if I donate ESPP shares? I assume FMV is deductible. Is the discount still my income if I donate ESPP shares?
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FIREchief
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Re: Tax reporting of donation of ESPP shares

Post by FIREchief »

MathIsMyWayr wrote: Tue Aug 25, 2020 5:42 pm
FIREchief wrote: Tue Aug 25, 2020 5:18 pm
MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
Are they all long term shares? Why do you think purchase price will matter? While you *may* be asked by the IRS to provide basis information, the deductible amount of long term shares is based solely upon market value upon donation. See my signature.

(or, are you referring to purchase options?)
Gains are all long term. If I sell ESPP shares, the purchase price is the basis, gains are subject to LTCG taxes and the discount becomes an ordinary income. Discount is like a deferred income. Am I still on the hook for the discount if I donate ESPP shares? I assume FMV is deductible. Is the discount still my income if I donate ESPP shares?
That's a question above my pay grade. :P Are you sure that the discount wasn't reported to you as income at the time of purchase?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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MathIsMyWayr
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Re: Tax reporting of donation of ESPP shares

Post by MathIsMyWayr »

FIREchief wrote: That's a question above my pay grade. :P Are you sure that the discount wasn't reported to you as income at the time of purchase?
Tax deferral on the discount until a disposition is an advantage of ESPP.
kxl19
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Re: Tax reporting of donation of ESPP shares

Post by kxl19 »

MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
My understanding is if the ESPP is a qualified plan, and the assets were held at least 2 years from offer date (the date you joined the ESPP) and 1 year from purchase (the date you received the discounted shares), then the gains above the purchase price (including discount) are LTCG. That means the price-15% is your cost basis.

Otherwise if sold before that period it's all taxed as ordinary income, including the discount.

I'm guessing your ESPP shares meet this criteria. If you donate them, it means you don't have to worry about the cost basis as you can deduct the total current value. (note - for it to be useful on your taxes, the you'd want the amount + any other deductions to be greater than the current fed standard deduction of ~25k for couples)
inbox788
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Re: Tax reporting of donation of ESPP shares

Post by inbox788 »

MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
I would just use the purchase price myself. YMMV.

My understanding is that you already paid taxes on the 15% when you received the shares. Does the 15% amount show up on your w-2 the year you got them?

Since you're donating the shares, there is a correct answer to the basis question, but there may be no practical consequence to making a mistake. AFAIK, it's a collected, but unused number in this situation. Even if you were to put zero or the current price as the cost basis, does anything else change? If you don't receive any additional tax benefit or have to pay extra taxes, and even if there ever were a correction, any taxes and penalties would be zero. So the only thing you have to worry about is avoiding an automatic error check that causes a red flag, which may cause issues somewhere else.
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MathIsMyWayr
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Re: Tax reporting of donation of ESPP shares

Post by MathIsMyWayr »

inbox788 wrote: Tue Aug 25, 2020 11:41 pm
MathIsMyWayr wrote: Tue Aug 25, 2020 5:09 pm I have highly appreciated ESPP shares obtained many years ago. If I donate some of them to charitable organizations, how should I report the discounts (15% off the offering price) on the purchase price when filing income tax return? I understand the discount will be added as an ordinary income. Will the employer issue a W-2 form if I am no longer an employee?
I would just use the purchase price myself. YMMV.

My understanding is that you already paid taxes on the 15% when you received the shares. Does the 15% amount show up on your w-2 the year you got them?

Since you're donating the shares, there is a correct answer to the basis question, but there may be no practical consequence to making a mistake. AFAIK, it's a collected, but unused number in this situation. Even if you were to put zero or the current price as the cost basis, does anything else change? If you don't receive any additional tax benefit or have to pay extra taxes, and even if there ever were a correction, any taxes and penalties would be zero. So the only thing you have to worry about is avoiding an automatic error check that causes a red flag, which may cause issues somewhere else.
Let me give an example.
Share price at purchase: $100
Discount: 15%
Share price at sale/donation: $500
I paid $85 with after tax money and the rest $15 was on the company. The $15 was not reported at the time. When I sell the share as a qualified disposition, the basis is $85, LTG is $400, and $15 is an ordinary income. The unreported $15 will show up as ordinary income on a W-2. If not, I still have to report it as ordinary income. If I donate, the entire $500 is eligible for tax deduction, but do I still have to report $15 as income?
the way
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Re: Tax reporting of donation of ESPP shares

Post by the way »

My guess is yes. If you have a disposition, that will trigger the compensation income taxes. Eg. if you gave your shares to your brother and even if he did not sell, you would owe taxes on the bargain element that year. When the brother sells, he will owe CG taxes on the rest of the gain.
GuyInFL
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Re: Tax reporting of donation of ESPP shares

Post by GuyInFL »

kxl19 wrote: Tue Aug 25, 2020 10:10 pm note - for it to be useful on your taxes, the you'd want the amount + any other deductions to be greater than the current fed standard deduction of ~25k for couples
That's true to be able to deduct the donation, but you can avoid the LTCG by donating the shares even if the dollars are under the 25K threshold.
inbox788
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Re: Tax reporting of donation of ESPP shares

Post by inbox788 »

MathIsMyWayr wrote: Wed Aug 26, 2020 1:59 amLet me give an example.
Share price at purchase: $100
Discount: 15%
Share price at sale/donation: $500
I paid $85 with after tax money and the rest $15 was on the company. The $15 was not reported at the time. When I sell the share as a qualified disposition, the basis is $85, LTG is $400, and $15 is an ordinary income. The unreported $15 will show up as ordinary income on a W-2. If not, I still have to report it as ordinary income. If I donate, the entire $500 is eligible for tax deduction, but do I still have to report $15 as income?
I don't think you should, but it appears to work differently. IMO, you're not receiving the income, the charity is, so they should pay the taxes, which is likely none.

I see the lack of clear direction on this particular point. It does look like the company will likely report W2 income on current year, so you'd have to deal with it. Hoping someone has a better answer.
swengineer
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Re: Tax reporting of donation of ESPP shares

Post by swengineer »

Let me give an example.
Share price at purchase: $100
Discount: 15%
Share price at sale/donation: $500
I paid $85 with after tax money and the rest $15 was on the company. The $15 was not reported at the time. When I sell the share as a qualified disposition, the basis is $85, LTG is $400, and $15 is an ordinary income. The unreported $15 will show up as ordinary income on a W-2. If not, I still have to report it as ordinary income. If I donate, the entire $500 is eligible for tax deduction, but do I still have to report $15 as income?
I think the basis in this example is wrong. Once you report the $15 as ordinary income, it should be added to the basis. This makes the LTCG calculation of sales price ($500) - basis ($100) = LTCG ($400)
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