CEP Employee Stock Purchase Plans (ESPPs) 2 — Questions and Answers
Question 1: For a Section 423 ESPP, what is the required holding period from the date of grant (offering date) to achieve a qualifying disposition?
- 6 months
- 1 year
- 2 years (Correct answer)
- 3 years
Correct answer: 2 years
To qualify for favorable tax treatment, shares must be held for more than two years from the offering (grant) date.
Question 2: In addition to the holding period from the offering date, what is the required holding period from the purchase date for a qualifying disposition under Section 423?
- 6 months
- 1 year (Correct answer)
- 18 months
- 2 years
Correct answer: 1 year
Shares must also be held for more than one year from the purchase date; both tests must be satisfied for a qualifying disposition.
Question 3: In a qualifying disposition of Section 423 ESPP shares purchased at a 15% discount with a look-back, how is the ordinary income component calculated?
- The entire difference between sale price and purchase price
- The lesser of the actual gain on sale or the discount from FMV at the offering date (Correct answer)
- 15% of the FMV at the time of sale
- The difference between FMV at purchase and the purchase price
Correct answer: The lesser of the actual gain on sale or the discount from FMV at the offering date
In a qualifying disposition, ordinary income equals the lesser of (a) the actual gain realized or (b) the discount from the FMV at the start of the offering period.
Question 4: What happens to any gain above the ordinary income component in a qualifying disposition of ESPP shares?
- It is treated as short-term capital gain
- It is treated as long-term capital gain (Correct answer)
- It is subject to FICA taxes
- It is deferred until the next tax year
Correct answer: It is treated as long-term capital gain
The gain in excess of the ordinary income amount in a qualifying disposition is treated as long-term capital gain, receiving preferential tax rates.
Question 5: Which IRS form must an employer file to report the transfer of stock acquired through a Section 423 ESPP?
- Form W-2
- Form 1099-B
- Form 3921
- Form 3922 (Correct answer)
Correct answer: Form 3922
Employers must file Form 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)) when ESPP shares are first transferred.
Question 6: In a disqualifying disposition of Section 423 ESPP shares, how is the ordinary income amount determined?
- The full sale proceeds minus the purchase price paid
- The FMV of the shares on the purchase date minus the amount paid (Correct answer)
- The discount from FMV at the offering date, capped at the actual gain
- The FMV at the time of sale minus the FMV at the offering date
Correct answer: The FMV of the shares on the purchase date minus the amount paid
In a disqualifying disposition, ordinary income equals the spread at exercise — the FMV on the purchase date minus what the employee actually paid.
Question 7: When an employee sells ESPP shares in a disqualifying disposition at a price LOWER than the FMV on the purchase date, what is the ordinary income recognized?
- The full 15% discount from the offering date FMV
- The difference between the FMV at purchase and the purchase price, limited to the actual gain (Correct answer)
- Zero, because the shares were sold at a loss
- The difference between the sale price and the purchase price paid
Correct answer: The difference between the FMV at purchase and the purchase price, limited to the actual gain
Ordinary income in a disqualifying disposition is the lesser of the spread at purchase or the actual gain; if sold below FMV at purchase, the ordinary income is capped at the actual gain.
CEP Employee Stock Purchase Plans (ESPPs) 2
For a Section 423 ESPP, what is the required holding period from the date of grant (offering date) to achieve a qualifying disposition?