Key Points

  1. Your company is required to file Form 3922 with the IRS and either give you a copy or present the same information on a substitute document.
  2. The form contains information about your purchases in your company’s tax-qualified employee stock purchase plan (ESPP) during the prior tax year. The terminology used by the IRS on the form may also be puzzling, as it involves words normally used with stock options rather than ESPPs.
  3. Along with any additional statements your company or its stock plan service provider gives you, the information on the form is useful to keep for your eventual sale of ESPP shares and the related tax reporting. If ESPP taxation perplexes you, then the information this form provides may improve your understanding.

Stock purchases made through an ESPP during a calendar year are reported to you and the IRS on Form 3922 early in the following year. Along with the revised Form 1099-B, Form 3922 helps you collect information for reporting sales of ESPP shares on your tax return.

Form 3922: The Basics

Your company is required to file Form 3922 with the IRS and either give you a copy or present the same information on a substitute document. The form contains information about your purchases in your company’s tax-qualified ESPP during the prior tax year. The IRS did not develop the form with any specific view toward helping you understand ESPP taxation or tax reporting, and this can compound the potential confusion about its importance. The terminology used by the IRS on the form may also be puzzling, as it involves words normally used with stock options rather than ESPPs.

Alert: With Form 3922, the IRS knows more information about ESPP purchases than it did before: specifically, about your tax basis and the calculation of ordinary income you owe when you sell the ESPP shares in a qualifying disposition (i.e., two years after the grant date and one year after the purchase date). Unless you sell your ESPP shares for less than your purchase price, you will always have ordinary income in this situation (regardless of whether you hold the stock for longer than one year). The failure to report this ordinary income on your tax return is a common error, and now the IRS will have the information to catch this mistake.

What to Do with the Form

Form 3922 adds nothing new to the ESPP tax rules: It does not change your tax return reporting or timing, and you do not send the form to the IRS or attach it to your tax return.

Taxes and tax reporting are still triggered only when you sell the ESPP shares, not at your purchase. If you already understand ESPP taxation, the form does not enhance your knowledge.

However, along with any additional statements your company or its stock plan service provider gives you, the information on the form is useful to keep for your eventual sale of ESPP shares and the related tax reporting. If ESPP taxation perplexes you, then the information this form provides may improve your understanding.

Translation of Form Information

Below are a table and an annotated diagram of the form that “translate” the information on the Form 3922. Instead of giving you a separate IRS form for each ESPP purchase during the prior year, many companies will give you a substitute form that aggregates all of your ESPP purchases during the year. However, a substitute form must still use the same terminology.

Example: You purchase ESPP shares on 12-31-2018. The stock price on the offering date (1-1-2018) is $10. The stock price on the purchase date is $11. The purchase price has a 10% discount on the market price on either the offering date or the purchase date, whichever is lower ($9 purchase price). You purchase 100 shares.

Box on Form 3922 ESPP Translation Example Data
  • 1. Date option granted
Date offering begins 1-1-2018
  • 2. Date option exercised
Date of purchase 12-31-2018
  • 3. Fair market value per share on grant date
Stock price when offering started $10
  • 4. Fair market value per share on exercise date
Stock price at purchase $11
  • 5. Exercise price paid per share
Purchase price of stock $9
  • 6. Number of shares transferred
Number of shares purchased 100
  • 7. Date legal title transferred
Date of purchase 12-31-2018
  • 8. Exercise price per share, determined as if the option was exercised on the date shown in the field “Date option granted”
Purchase price of the stock at the start of the offering, even if there is no lookback or when this is really the higher price with a lookback (when it is the lower price, it will equal your purchase price) $9

Annotated Diagram of Form 3922

Below is an example of Form 3922 that translates the IRS terminology. As mentioned above, your company does not need to use the IRS form and can provide similar information on a substitute statement.

IRS Form

ESPP Taxation When You Sell the Shares

Now that you have this information, let’s look at its function in ESPP taxation. When you sell shares, the tax treatment depends on your sale price and how long you held the shares after purchase.

Tax Calculation

Indicating the boxes on the form, the table below presents the tax treatment calculation when you sell your ESPP stock:

Tax Disqualifying disposition1 Qualifying disposition2
Ordinary income Box 4 – Box 5 Box 3 – Box 83
Plus capital gain or loss Sale price – Box 4 Sale price – [Box 5 + (Box 3 – Box 8)]
Just capital loss Never Sale price (when less than purchase price) – Box 5
  • 1 Sale less than two years from the offering date or less than one year from the purchase date. The ordinary income will also appear on your Form W-2.
  • 2 Sale more than two years from the offering date and more than one year from the purchase date.
  • 3 When the actual gain at sale is less than the discount on the purchase date (Box 3 – Box 8), the ordinary income is the amount of the actual gain at sale (Sale price – Box 5), with no capital gain or loss. The ordinary income should appear on your Form W-2, though not all companies do this if they do not continue to track sales after the required holding period has been met.

Example: The table below uses the information from the example above to calculate the taxes: a $10 market price on the offering date, an $11 market price on the purchase date, a 10% discount with a lookback, and a $9 purchase price. (OI is ordinary income, CG is capital gain, CL is capital loss.)

Sale price Disqualifying disposition1 Qualifying disposition2
$12 $2 OI and $1 CG $1 OI and $2 CG
$11 $2 OI and no CG/CL $1 OI and $1 CG
$10 $2 OI and –$1 CL $1 OI and no CG/CL
$9.50 $2 OI and –$1.50 CL $0.50 OI and no CG/CL
$8 $2 OI and –$2 CL $0 OI and –$2 CL
  • 1 Sale less than two years from the offering date or less than one year from the purchase date. The ordinary income will also appear on your Form W-2.
  • 2 Sale more than two years from the offering date and more than one year from the purchase date. The ordinary income should appear on your Form W-2, though not all companies do this if they do not continue to track sales after the required holding period has been met.