Question

Dara sells shares of stock she acquired by exercising options granted to her under an employee stock purchase plan (ESPP). The price she paid when she purchased the stock was the fair market value at the time; no discount was available. If Dara sells the stock for a profit in a qualifying disposition, how does she report the difference between her basis and the sale price? (a) Compensation income subject to income tax, as well as social security and medicare taxes. (b) Ordinary income. (c) Short-term capital gain. (d) Long-term capital gain.

Answer 1

When we sell the shares acquired under ESPP for a profit, the following gains come into picture:

Compensation income/Earned Income: Difference between the offer price and Fair market value. When the shares are sold in a disqualifying position.

Short Term capital Gain: When the holding period is less than 1 year and part of income which is not ordinary income

Long term capital Gain: When the holding period is greater than 1 year and part of income which is not ordinary income

Here the shares were sold for profit in a qualifying disposition, which means that the following two gains can come into picture:

Compensation income/Earned income: However, in this case since Dara was offered a price no less than the Fair market value, this income does not arise.

Long term Capital Gain: The entire profit (difference between her basis and sale price) will be reported as Long term capital gain since there was no discount and since the shares were sold after the period of disqualifying, which means it was held for long term.

Answer would be (d) Long-term capital gain.