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October 03.2025

2 Minutes Read

Why Adjust Your Cost Basis for ESPP Shares on Your Tax Return?

Man adjusting basis from Form 1099-B on laptop with motivational text.

Understanding the Implications of ESPP Income Reporting

Employee Stock Purchase Plans (ESPPs) are increasingly popular perks that allow employees to purchase company stock, often at a discounted rate. However, navigating the tax implications can be quite complex. When you sell shares acquired through an ESPP, you may encounter two primary types of tax events: ordinary income and capital gains. Essentially, you could be looking at double taxation if you don’t handle your tax reporting correctly.

Why Adjusting Your Cost Basis Matters

When you receive your Form 1099-B, it lists the proceeds from your sales but often reflects a much lower cost basis that doesn’t include the compensation income reported on your Form W-2. This mismatch can lead to confusion and the potential for double taxation when you prepare your tax return. Understanding how to adjust this basis is critical to ensuring compliance with tax laws.

Detailed Breakdown of ESPP Transactions

ESPPs enable participants to buy shares at a discount, typically around 15%. When employees sell these shares, they must determine the correct adjusted cost basis. This basis includes not just the amount spent on the stock, but also the benefit received from the discount, which should be reported as ordinary income on your W-2.

What Happens If You Don’t Adjust?

If the cost basis on your Form 1099-B isn’t adjusted according to the income already reported, you risk being taxed on gains you did not actually earn, due to the IRS considering the income reported twice. In cases of “disqualifying dispositions,” which occur when shares are sold before meeting requisite holding periods, the consequences can be even more severe.

Steps to Correct Your Tax Return

To correctly account for your ESPP shares:

Confirm the cost basis on your Form 1099-B against your investment records.
Adjust your cost basis on the tax return using adjustment code B if necessary.
Report your ESPP activity accurately on Schedule D to avoid unnecessary taxation.

By making these adjustments, you significantly mitigate the risk of overpaying taxes on ESPP income.

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Why Adjust Your Cost Basis for ESPP Shares on Your Tax Return?

Understanding the Implications of ESPP Income Reporting

Why Adjusting Your Cost Basis Matters

Detailed Breakdown of ESPP Transactions

What Happens If You Don’t Adjust?

Steps to Correct Your Tax Return

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