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DECEMBER 2014
Filing Your Tax Forms After
Selling Your Employee Stock
Purchase Plan (ESPP) Shares
SUMMARY
Morgan Stanley has prepared the following
information to assist you in understanding the
tax consequences involved when selling shares
from an ESPP. Included are sample forms and
an explanation of the information for reporting
the sale of these shares on your individual
income tax return for 2014. Please retain all
forms sent to you by Morgan Stanley to use when
preparing your tax return. Morgan Stanley and
its affiliates do not provide tax or legal advice.
You should, therefore, seek tax advice based
on your particular circumstances from an
independent tax advisor of your choosing.
Q. What
information do I need
to file my tax return?
A. The following pages describe the
information you will need when you
prepare your 2014 individual income
tax return (Form 1040). Assemble the
following forms when you are ready to
prepare your tax return:
Your Purchase Confirmation Form
Form W-2, Wage and Tax Statement
from your employer
Morgan Stanley’s Form 1099-B
IRS Form 8949: Sales and Other
Dispositions of Capital Assets
Schedule D (Form 1040): Capital
Gains and Losses
filing your tax forms
Where do I get the information I need?
Forms
How to Obtain
Questions?
Purchase Confirmation Form
(or equivalent information
from your account, see next
page for example)
This is mailed to your home at the time of your
original purchase.
Call Morgan Stanley’s Customer Service
Department at the toll-free number
provided on the Tax Reporting Statement
(Form 1099-B).
Form 1099-B
Morgan Stanley sends this to you by February
15th* of the year following that in which the
disposition occurs.
Call Morgan Stanley’s Customer Service
Department at the toll-free number
provided on the Tax Reporting Statement
(Form 1099-B).
Form W-2
Your company will send this to you.
Call your company’s payroll department.
IRS Form 8949
Visit your local IRS office or call (800) TAX
FORM. You may also obtain this form via the
Internet at www.irs.gov.
Call your local IRS office or consult your
tax advisor.
Schedule D (Form 1040)
Visit your local Internal Revenue Service (IRS)
tax office or call (800) TAX FORM. You may
also obtain this form via the Internet at
www.irs.gov.
Call your local IRS office or consult your
tax advisor.
* The Energy Improvement and Extension Act of 2008 changed the due date for providing Forms 1099 to recipients to February 15th.
Q. What
is a Qualified 423 plan
and how does it work?
A. A Qualified 423 plan is considered
a tax-qualified plan by the IRS if it is
administered according to the regulations set out in Section 423 of the
U.S. Internal Revenue Code and your
company explicitly states it is intended
to qualify under the Code. This allows
participants to benefit from special
tax considerations if shares are held
at least two years from the grant date
offering period and one year from the
acquisition of the shares. Sales after
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this time are identified as “qualified
dispositions,” whereas sales during this
time are identified as “disqualifying
dispositions.” Compensation income
for 423 plans is not taxed until the
year of sale.
Q. What
is a Non-qualified plan
and how does it work?
A . A Non-qualified plan is the term used
for any other ESPP that is not structured and administered as a Qualified
Section 423 plan. These plans do not receive any special tax consideration, and
compensation income on discounted
Non-qualified plans is taxed the year
shares are purchased.
Filing Information
The following example reflects a salary
of $45,000 and an acquisition of 200
shares of ABC Company stock. The
exhibits will show you where you can
find the information you need to prepare your individual tax return. These
examples will show the results of stock
sales for both Qualified Section 423
plans and Non-qualified plans.
filing your tax forms
Step 1
Your compensation income from
the purchase of your ESPP shares
If your plan does not offer a discount
on the purchase of shares, there is
no compensation income recognized.
For plans that do offer a discount, the
amount of compensation income that
will be reported is calculated in the
table on the right.
Exhibit 1 shows the purchase confirmation from Morgan Stanley for a
plan with a 12-month offering period,
a 6-month purchase period, a 15% discount, and a “look back” that allows
the final discounted purchase price
to be based on the lesser of the grant
date FMV or purchase date FMV. Your
company’s plan parameters may differ,
however, the sample calculations would
use the same fields as the exhibit.
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2014
The example above is hypothetical and does not reflect the results of an actual purchase. You may
instead receive a company-provided confirmation when shares are acquired, depending on your
company’s preferences.
Type of Disposition
Compensation Income
Qualifying Disposition (QD)
Lesser of: the amount of the discount based on the grant date Fair Market Value (FMV)
multiplied by the number of shares acquired.
OR
The sales price per share minus the actual price paid per share times the number
of shares (or total gain).
Disqualifying Disposition (DD)
Amount of the discount based on the purchase date FMV multiplied by the number
of shares acquired.
Other Disposition
(e.g., Non-qualified Plans)
Same as a Disqualifying Disposition, only taxable in the year of purchase instead
of the year of sale.
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filing your tax forms
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For Qualified plans, your company
will include the total amount of the
discount as compensation income
on your Form W-2 during the year of
the sale (as shown in Exhibit 2). For
Non-qualified plans, compensation
income is included on your Form W-2
during the year of purchase. This
amount will be added to any other
income reported by your company to
the IRS, as seen in a §above. In this
example, shares were sold the same
year they were purchased, resulting
in a disqualifying disposition. The
amount of compensation income is
determined by using the discount on
the date of purchase.
Since there is a look back provision,
the participant received a discounted
purchase price of $30.175 per share
when the FMV on the purchase date
was $45.50. Compensation income
and cost basis are calculated as shown
in the Disqualifying Disposition chart.
The forms in this g uide ref lect
a disqualifying disposition, so the
$3,065 gain realized at the purchase of
company stock has been added to the
salary of $45,000. Please note that no
taxes are withheld by Morgan Stanley
at the time of purchase.
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Qualifying Disposition
If the shares were sold after June 1, 2016,
it would be a qualifying disposition with
compensation income being the lesser of
1) the total discount at grant or 2) the actual
gain or loss on the sale (see Exhibit 4).
Grant Date Discount
$35.50 − $30.175 = $5.325 per share
$5.325 × 200 shares = $1,065 compensation income
Actual Gain (Loss) on Sale
$50.25 − $30.175 = $20.075 per share gain
($20.075 × 200 shares sold) − $25 commissions & fees
= $3,990 actual gain
Cost Basis (Reported on 1099-B)
$30.175 × 200 shares = $6,035.00
The lesser of these two calculations is $1,065, which is what would appear on the
Form W-2 as compensation income for a qualified disposition.
The compensation income should be considered when calculating adjusted cost basis for
Form 8949.
Disqualifying Disposition
Compensation Income
$45.50 − $30.175 = $15.325 per share discount
$15.325 × 200 shares purchased = $3,065
compensation income
Cost Basis
$45.50 × 200 shares = $9,100
The example above is hypothetical and does not reflect the results of an actual sale or transaction.
filing your tax forms
Step 2
Capital gains and/or losses
Calculate your capital gains and/or
losses using the appropriate IRS forms.
All capital transactions are reported
on Form 8949 Sales and Other Dispositions of Capital Assets (Exhibit 3);
the subtotals from this form are
then carried over to IRS Form 1040
Schedule D Capital Gains and Losses
(Exhibit 4), where gain or loss is calculated in aggregate.
Definitions
The Fair Market
Value of your company’s stock on the
date of grant. This is usually defined
as the beginning of the offering period, although your company’s plan
may differ.
The Fair Market
Value of your company’s stock on the
date of purchase.
A sale of
shares from a Qualified Section 423
plan that occurs more than two years
after the Grant Date and more than one
year after the Purchase Date.
Any sale
of shares from a Qualified Section 423
plan that occurs before the Qualifying
Disposition time period ends.
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Complete appropriate Short-Term or Long-Term section. Check appropriate Box A, B or C, depending
on what is provided within either Box 3 or Box 5 on your 1099-B.
Sections b, c, d and e should be populated with the amounts from your 1099-B. Section g should
include any compensation income associated with the transaction.
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Part I corresponds with Part I of Form 8949. The totals from Form 8949 are to be carried over to
Schedule D.
The example above is hypothetical and does not reflect the results of an actual sale or transaction.
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filing your tax forms
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Questions & Answers
Q. How
can I determine my capital
gain or loss on shares sold?
A. Please refer to Step 2 of this brochure.
Q. What
if my plan discount is
greater or less than 15%?
A. A different discount will affect the
total compensation income, however,
the method for calculating the total as
shown in Step 1 remains unchanged.
Q. What is the cost (tax) basis of
shares I obtained through an ESPP?
A. The term “cost basis” refers to the
original value of an asset for tax purposes (usually the purchase price), adjusted for wash sales, stock splits, dividends
and return of capital distributions. In
the case of selling shares from an ESPP,
adjusted cost basis is calculated by adding the per share purchase price of the
stock to the compensation income per
share of the stock (if any). The cost basis
will differ depending on the nature of
the disposition. Please refer to Step 1
for more details.
The cost basis is used to determine
capital gain or loss when an asset is sold
or disposed of. In accordance with reporting requirements, Morgan Stanley
will report the purchase price, or original cost basis, not the adjusted cost basis, for the 2014 tax year. We will also
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Note: The example shown in Exhibit 5 is based on one transaction. If you conducted multiple
transactions in 2014, you must list each separately on Schedule D.
include adjustments for wash sales,
in compliance with the regulatory requirement. As shown on Exhibit 5 you
can find b “Cost or other basis” on
your 1099. Any additional compensation as a result of the transaction must
be reported on Form 8949.
Q. Can I file a Form 1040EZ or Form
1040A with a Form 8949 and a Schedule D for a year in which I sold stock?
A. No, you are not permitted to file
a Form 1040EZ or Form 1040A for a
year in which you have sold any stock.
Form 8949 and Schedule D must be attached to Form 1040.
Q. How are the Grant Date and
Purchase Date FMVs determined?
A. Please refer to your company’s plan
documentation for the exact date and how
the price is determined.
Q. What if I no longer work for the
company after I sell the stock?
A. The IRS requires a Form 1040 to be
filed whenever any stock is sold, regardless of employment status.
THE MORGAN STANLEY ADVANTAGE
For nearly 80 years, Morgan Stanley has been a leader, innovator and resource for successful individuals
and their families, as well as corporations, foundations and endowments. Our Financial Advisors work
from an extensive knowledge base built on diverse skills, experience, training and professional interests.
The Global Stock Plan Services unit of Morgan Stanley has over four decades of experience delivering
advice and transaction support to stock plan administrators and participants. We are also a market leader
in providing financial solutions to meet the specialized needs of executives, including #1 in 10b5-1 plans.*
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filing your tax forms
* Source: Washington Service. Morgan Stanley ranked #1 in 10b5-1 market share from 2005 through 2013. Data from the period 2/1/2005 to 5/31/2009
reflects the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of
Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. This data also includes transactions from Morgan Stanley & Co. LLC.
Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed. Information
contained herein is subject to change.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax
or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters.
© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.
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