U.S. Form 3922: Transfer of Stock Acquired Through an ESPP

If you participated in an Employee Stock Purchase Plan (ESPP), you might have received Form 3922 in the mail. But what does it mean? Is it something you need to file with your taxes? And how does it impact what you owe?

Let’s learn about all of this in the blog-post.

What is Form 3922?

Form 3922 is an IRS form that reports stock purchases made through a tax-qualified ESPP.

In a tax-qualified ESPP, employees can purchase company stock, often at a discount to the stock's fair market value (FMV), with no tax due at the time of purchase. 

Instead, taxes are owed on the discount received when the shares are sold.

While employees don’t need to file Form 3922 with their tax return, it serves as an important reference for calculating their cost basis and taxable gain at the time of sale. The IRS mandates companies to issue this form to ensure that discounted stock purchases through an ESPP are accurately recorded and reported.

Note: Cost basis refers to the original value of an asset for tax purposes, typically the purchase price.

Who needs to file Form 3922?

All employers offering a tax-qualified Employee Stock Purchase Plan (ESPP) under IRC Section 423 are required to file IRS Form 3922 for each calendar year in which they transfer stock to an employee as part of their ESPP purchases.

Who receives Form 3922 and why?

Employees who purchase stock through a tax-qualified ESPP, have the shares transferred into their name and paid less than the stock’s FMV on the purchase date receive Form 3922 from their employer.

Who must receive copies of Form 3922?

IRS regulations require employers to prepare and distribute three copies of Form 3922:

• Copy A – Sent to the IRS at the designated processing center where the company files its tax returns.
• Copy B – Provided to the employee for personal tax records and future cost basis calculations.
• Copy C – Retained by the company for internal corporate records.

Employers must distribute copies to employees by January 31 of the following year and file with the IRS by February 28 (or March 31 if filing electronically).

When is Form 3922 required?

Form 3922 must be filed whenever legal ownership of stock is transferred to an employee under a tax-qualified ESPP.

Exceptions: When is Form 3922 not required?

Employers are not required to issue Form 3922 under the following circumstances:

• The employee is a nonresident alien, as defined by the IRS under Section 7701(b).
• The company is not required to issue the employee a Form W-2 (Wage and Tax Statement) for any year between the grant and purchase of the stock.

Form 3922 vs. Form 3921

Both Form 3922 and Form 3921 are IRS forms used to report stock transactions, but they apply to different types of equity compensation.

Form 3922 reports purchases through an ESPP, whereas Form 3921 reports the exercise of Incentive Stock Options (ISOs).

Form 3921: Reporting ISO exercises

Form 3921 is used to report the exercise of Incentive Stock Options (ISOs). ISOs give employees the option to buy company shares at a fixed exercise (strike) price  once they vest, with potential tax benefits if held for at least two years from grant and one year from exercise.

When an employee exercises an ISO, the employer must file this Form 3921 to document the transaction.

What information does Form 3921 include?

• The grant date of the stock option.
• The exercise date (when the employee exercised the option to buy shares).
• The exercise price per share paid by the employee.
• The fair market value per share on the exercise date.
• The number of shares acquired through the exercise.

Form 3922: Reporting ESPP stock purchases

Unlike ISOs, ESPPs let employees buy company stock directly.

Employees typically contribute after-tax payroll deductions over an offering period and then purchase shares at a price lower than market value. 

The discounted purchase price creates a potential taxable event when the shares are sold.

What information does Form 3922 include?

• The grant date (when the ESPP offering period began).
• The purchase date (when shares were actually bought and transferred to the employee).
• The fair market value on the grant date (if a lookback provision applies).
• The fair market value on the purchase date.
• The actual purchase price paid by the employee.
• The number of shares purchased

Note: A lookback provision allows employees to purchase company stock at the lower of two prices: the stock price at the beginning of the offering period or the stock price at the end of the purchase period.

How Form 3922 affects your taxes

Although Form 3922 itself does not require any immediate tax reporting, it becomes essential when an employee sells their ESPP shares. The tax treatment of an ESPP sale depends on how long you hold the shares before selling.

Qualifying disposition (lower taxes)

To qualify for favorable tax treatment, the employee must hold the shares for:

• At least 2 years from the grant date (offering date), and
• At least 1 year from the purchase date.

If these conditions are met:

• The discount is taxed as ordinary income, calculated as the lesser of (a) the FMV on the grant date or (b) the FMV on the purchase date, minus the actual purchase price paid.
• Any additional gain is taxed as long-term capital gains, which typically has lower tax rates.

Disqualifying disposition (higher taxes)

If the shares are sold before meeting the 2-year/1-year holding period, the sale is considered a disqualifying disposition, meaning:

• The discount received at purchase (difference between the stock’s fair market value on purchase date and what you paid) is taxed as ordinary income.
• Any additional gain is taxed as capital gains (short-term or long-term, depending on how long you held the shares).

Example

Let’s assume the following details for an Employee Stock Purchase Plan (ESPP):

• Offering date (grant date): January 1, 2022
• Purchase date: June 30, 2022
• FMV on offering date: $50 per share
• FMV on purchase date: $60 per share
• ESPP discount: 15% off the lower of the offering date or purchase date FMV
• Purchase price: $42.50 per share (15% off of $50, since the offering date FMV was lower)
• Sale price: $100 per share

Now, let’s analyze how the sale of these shares would be taxed under both qualifying and disqualifying dispositions.

Scenario 1: Qualifying disposition (lower taxes)

The employee holds the shares for at least 2 years from the offering date (Jan 1, 2022) and at least 1 year from the purchase date (June 30, 2022) before selling them on July 1, 2024 for $100 per share.

Tax Treatment

Ordinary income (discount taxed as ordinary income)

The discount is calculated based on the lesser of:
FMV on offering date = $50
FMV on purchase date = $60

The lower FMV is $50, so the discount = $50 - $42.50 = $7.50 per share

This $7.50 per share is taxed as ordinary income.

Long-term capital gains (favorable rates)

Sale price = $100 per share
Adjusted cost basis = ($42.50 + $7.50 = $50) per share
Gain = $100 - $50 = $50 per share

Since the sale qualifies for long-term capital gains, this $50 per share is taxed at long-term capital gains rates

Scenario 2: Disqualifying disposition (higher taxes)

The employee sells the shares on December 30, 2022, just six months after purchasing them. This does not meet the 2-year/1-year holding rule, so it is a disqualifying disposition.

Tax Treatment

Ordinary income (discount taxed as ordinary income)

The discount is calculated based on the FMV on the purchase date ($60), not the offering date.

Discount = $60 - $42.50 = $17.50 per share

This $17.50 per share is taxed as ordinary income at the employee’s regular income tax rate.

Capital gains tax (short-term or long-term)

Sale price = $100 per share
Adjusted cost basis = ($42.50 + $17.50 = $60) per share
Capital gain = $100 - $60 = $40 per share

Since the shares were held for less than 1 year, this $40 per share is taxed as short-term capital gains (which is taxed at ordinary income tax rates).

Note: To calculate the adjusted cost basis, you should add the discount to the purchase price. 

FAQs

1. What is Form 3922 used for? 

Form 3922 is used to report the transfer of stock acquired through a tax-qualified Employee Stock Purchase Plan (ESPP). It provides the IRS and employees with necessary details about the transaction, including the purchase price, fair market value on the grant and purchase dates, and the number of shares acquired.

This information helps employees calculate their tax obligations when they sell the shares.

2. What are the deadlines for filing Form 3922? 

Employers must provide Copy B of Form 3922 to employees by January 31 of the year following the stock transfer. Paper filings with the IRS are due by February 28, while electronic filings are due by March 31.

3. What are the penalties for late filing of Form 3922? 

Penalties vary based on how late the filing is:

• Within 30 days after the deadline – $50 per form, up to $547,000 per year ($191,000 for small businesses).
• Between 30 days after the deadline and August 1 – $100 per form, up to $1,641,000 per year ($547,000 for small businesses).
• After August 1 or never filed – $270 per form, up to $3,282,500 per year ($1,094,000 for small businesses).

4. Who is required to file Form 3922? 

Employers offering stock through a tax-qualified Employee Stock Purchase Plan (ESPP) under IRC Section 423 must file IRS Form 3922 for each calendar year in which they transfer stock to an employee.

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