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Posted by Alan on February 5, 2008, 12:25 pm
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Pedro wrote:
> Hi, I found a few threads in the archives about dealing with
> discounted option prices for ESPP stock that is sold, but none really
> touched on the following point.
>
>>From Pub 525 (2007, p. 12, under <b>Option granted at a discount</b>):
>
> "...you must include in your income as compensation, the lesser of:
>
> * The amount, if any, by which the price
> paid under the option was exceeded by
> the fair market value of the share at the
> time the option was granted, or
>
> * The amount, if any, by which the price
> paid under the option was exceeded by
> the fair market value of the share at the
> time of the disposition or death.
>
> For this purpose, if the option price was not fixed
> or determinable at the time the option was
> granted, the option price is figured as if the
> option had been exercised at the time it was
> granted."
>
> In my case, the options were granted every six months with the option
> price being 85% of the lesser of a) the fair market value of the stock
> on the offering date (i.e., the beginning of the six month period) or
> b) the fair market value on the exercise date. Therefore the option
> price was not <i>fixed or determinable at the time the option was
> granted</i>, even though the formula allowed the price to be
> determined on the exercise date.
>
> Accordingly, I interpret this section of Pub. 525 to mean that when I
> sell my ESPP shares (after meeting the holding period), I should
> include as ordinary income the lesser of:
> a) fair market value on the offering date - discounted price on the
> offering date, or
> b) sale price - discounted price on the offering date.
>
> In each case, it doesn't necessarily matter what the actual price I
> paid for the stock was because the amount subtracted is the discounted
> price on the offering date, given that the option price throughout the
> six-month period was not determinable on the grant date.
>
>
> Does this interpretation seem correct, or at least valid? I look
> forward to your responses.
>
> Thanks,
> Pedro
>
If you hold the shares for more than the two year statutory
period from date of grant AND more than one year from the date of
purchase, ordinary gain from a disposition (sale, gift, death)
will be the LESSER of 15% of FMV at date of grant or the actual
gain on the date of disposition. Any additional gain is
long-term capital. If sold at a loss, there is no ordinary
income... just a long term capital loss.
If you fail the above test and have a disqualifying disposition,
ordinary income is equal to the excess of FMV over the purchase
price on the date of purchase. Ordinary income is then added to
the purchase price to derive the adjusted cost basis for
computing the capital gain or loss.
--
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