ESPP Tax Questions

[Rose999]

I had a qualified ESPP account at Computershare. I used after-tax $ to purchase company stock at a discounted price (15% discount) between year 1991 – 1994 when I was an employee. Recently those shares were transferred in-kind from Computershare to Fidelity brokerage account. I don’t plan to sell them in my life time; it’s likely they will go to my heir.

Here are my tax questions:
1) Will I get any tax document from Computershare or Fidelity for the in-kind transfer I did this year (2024)? If yes, what form(s)?

2) My understanding is that any discount I received when I purchased those shares should be reported as ordinary income when the shares are sold. But what happens if I don’t sell them in my lifetime? How/when to report the discount that I received as ordinary income?

3) The capital gain/loss tax should be reported to IRS when the shares are sold. If I pass these ESPP shares to my heir, my heir will get a stepped-up basis and he will pay the tax based on the adjusted cost basis when he sells the shares. Correct?

Thanks in advance for any information that is offered.

[FiveK]

1. We did this some years ago. Don't recall needing to do anything when filing, but someone with more recent knowledge may comment.

2. The discount should have been reported those 20+ years ago. Water under the bridge at this point: no need to do anything at all if you don't sell them.

3. Yes, the heir gets a basis of the shares' value when you died, and any sale of those shares (even 1 day later) counts as a long-term capital gain or loss, depending on the price when he sells them. The ESPP discount you received has no effect on your heir.

[ejm009]

I seem to recall the discount is taken when shares are sold not bought.
People often get W-2 for the discount years after leaving the company.
One reasoning is the case when the shares have declined below the purchase price = no compensation income.

[FiveK]

I seem to recall the discount is taken when shares are sold not bought.

That's possible: different ESPPs have different rules....

Rose999, you could call Fidelity and ask them what they would or wouldn't report upon a sale by you, or by your heir.

[ssel]

1) Will I get any tax document from Computershare or Fidelity for the in-kind transfer I did this year (2024)?

A trustee-to-trustee transfer is not a taxable event, so you should not expect any form.

2) My understanding is that any discount I received when I purchased those shares should be reported as ordinary income when the shares are sold. But what happens if I don’t sell them in my lifetime? How/when to report the discount that I received as ordinary income?

Since these are qualifying dispositions (you held for the necessary holding period), it's probably not the 15% discount that needs to be reported as ordinary income, but rather 15% of the price on the grant date. Details vary a bit from plan to plan, and if the price has trended downward, the amount of ordinary income could be capped below that amount.

Dying won't get you out of it. You (well, your estate) must report this ordinary income on your final return in the year of your death. See 26 CFR § 1.423-2(k)(3) - Example 7.

3) If I pass these ESPP shares to my heir, my heir will get a stepped-up basis and he will pay the tax based on the adjusted cost basis when he sells the shares. Correct?

Yup.