Form 3922: IRC Sec. 423(c) Stock Options from a Employee Stock Purchase Plan under 423(c)

Do you get stock options at work from an employee stock purchase plan? Did you get Form 3922 and wonder what to do with it? The tax implications of the employee’s disposition of stock acquired upon the exercise of a purchase right granted pursuant to a §423 plan will depend on whether the employee disposes of the stock before or after the statutory holding period has been met. The applicable holding period is the later of (1) two years from the date of grant of the purchase right, and (2) one year from the date of exercise of the purchase right. The rules regarding when the transfer of stock is considered a disposition are the same as for ISOs (incentive stock options).

If the employee sells or otherwise disposes of the stock after the expiration of the statutory holding period, or in the event of the employee’s death (whenever occurring), i.e., a qualifying disposition, then in the year of the qualifying disposition, the employee (or the employee’s estate in the event of death) is required to recognize ordinary income equal to the lesser of: (1) the excess of the fair market of the stock on the date of grant of the purchase right over the exercise price of the purchase right, and (2) the excess of the amount realized on the disposition of the stock over the exercise price of the purchase right.  Any additional gain or loss recognized on the disposition of the stock will be long-term capital gain or loss.

If the employee sells or otherwise disposes of stock before the expiration of the statutory holding period, i.e., a disqualifying disposition, then in the year of the disqualifying disposition, the employee is required to recognize ordinary income equal to the excess of the fair market value of the stock on the date of exercise of the purchase right over the exercise price. Any additional gain or loss recognized on the disposition of the stock will be short- or long-term capital gain or loss, depending on the length of time the employee holds the stock after exercise of the purchase right.

After reading this you still may wonder “Okay, I still don’t know what to do…” If that is the case, or if you do understand but you have related question click here to contact Paul about this topic.

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