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Form 3922 on Tax Return: What You Need to Know
When the season of taxes comes around there is a bit complexity in the environment, especially for American tax payers who are new to taxes and even the experienced ones who are not updated with the ever-changing tax laws, when an employer or an employee buys a stock share through ESPP they have to get their profit reported to the IRS to avoid any type of penalties. For this submission, IRS Form 3922 is used to report all transfer of stocks by ESPP.
Now the main question arises, what is Form 3922? What is it exactly used for? Why do we need it? All the questions will be answered here, we will guide you through the whole process, and describe its importance in taxes and tax reporting to the IRS.
What Exactly Is Form 3922?
Form 3922 is an informational IRS form issued by employers when employees exercise an option to buy stock through an ESPP (Employee Stock Purchase Plan) and the exercise price was less than 100% of the stock’s fair market value at the time of purchase.
Key Purpose of Form 3922:
- Tracks the movement of shares acquired through an ESPP.
- Helps ascertain your cost basis when you subsequently sell the stock.
- Ensures you record any gain or loss on your tax return accurately.
Who Receives Form 3922?
If your employer has an ESPP and you exercise an option to acquire shares, you will get Form 3922 for each transfer of stock that meets the reporting conditions. However, this form is not submitted with the IRS—it’s for informative purposes to assist you compute taxes when you sell the shares.Â
How Does Form 3922 Affect Your Taxes?
1. Understanding Your Cost Basis
The most crucial item on IRS Form 3922 is the cost basis of your stock. This is the exercise fee you paid, plus any modifications.
- If you sell the stock later, you will need the information from Form 3922 to compute your gain or loss on your tax return.
- If you sell the stock for more than your cost basis, you’ll have a capital gain. If you sell it for less, you’ll have a capital loss.
2. Reporting the Stock Sale on Your Tax Return
If you sell or otherwise dispose of the stock, you must declare the sale on your tax return.Â
- The sale is reported on Form 8949 and summarized on Schedule D.
- Your cost basis should match what’s computed using Form 3922.
- The IRS requires you to input the correct cost basis to avoid overpaying taxes.
Many brokers do not automatically modify the cost basis on Form 1099-B, meaning you might need to manually fix it using the information on Form 3922.
How to Use Form 3922 to Report ESPP Stock Sales
When filing your tax return for the year, you should follow the following steps:
Find Your Cost Basis:
Always use Form 3922 to determine the correct cost basis for your stock.
The exercise price and fair market value at purchase will be listed on the form.
Determine the Type of Sale:
If you sell the stock immediately after purchase, the sale is taxed as ordinary income.
If you are holding a stock for a long period like a year or so, that would count as a long-term capital gain rates.
Enter the Sale on Your Tax Return:
Report the sale on Form 8949 and Schedule D.
Ensure the basis is adjusted correctly so you don’t overpay your taxes.
Example:
If you bought stocks at around $20 per share and later sold it for $30 per share, your gain is $10 per share. The amount you just earn per share must be reported the IRS.Â
Key Information on Form 3922
Form 3922 contains a lot of key points that should be in mind when reporting your stock sale:
- Grant day: The day you were granted the option to purchase stock.
- Exercise Date: The date you actually exercise an option to buy the shares.
- Fair Market Value on Exercise Date: The market price when you exercised the option.
- Exercise Price per Share: The price you actually paid for the stock.
- Number of Shares Transferred: The entire number of shares you purchased.
Keep the form for your records because you’ll need it when you eventually sell your shares.
How to File Form 3922 (If You’re an Employer)
Employers and self-employed are required to file form 3922 with the IRS and send a copy to employees who have taken part in an employee stock purchase plan under section 423.
- Employers must file it online if they issue more than 250 forms
- The form must be provided to employees by January 31 of the year following the stock transfer.
Example:
If an employee exercises an option in 2024, the form 3922 must be filed by the employer befor January 31, 2025.
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Common Mistakes When Reporting Form 3922 on Your Tax Return
- Forgetting to change cost basis – Brokers often report an inaccurate cost basis, leading to increased taxable revenue.
- Not reporting the stock transaction — Even if your broker doesn’t issue a tax form, you must disclose the sale.
- Ignoring holding periods — Selling stock too quickly can result in greater taxes.
 Use Form 3922 to calculate your exact cost basis and ensure accurate tax filing. Â
Lastly Why Form 3922 Matters for Your Taxes and Why is it Important?Â
Form 3922 is a compulsory document for anyone participating in an employee stock purchase plan (ESPP). While this form does not need to be completed with the IRS, it plays a vital part in determining your gain or loss when you sell your shares.
Key Takeaways:
- Form 3922 helps you track the transfer of stock acquired through an ESPP.
- You must recognize income when the stock is sold.
- Properly put the cost basis on your tax return to prevent overpaying.
- Keep the form for your records because you’ll need it when reporting stock sales.Â
By understanding how to use Form 3922, you can secure appropriate tax reporting and avoid unexpected tax bills.Have you sold shares obtained through an ESPP by filing Form 3922? Make sure you’re reporting it accurately during tax season! Good Luck!
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