When selling your Employee Stock Options (ESOPs) or Employee Stock Purchase Plan (ESPP) shares, it’s crucial to use the Fair Market Value (FMV) as of the grant or purchase date to determine the cost basis, not the actual amount you paid. This is because you’ve already paid tax on the difference between the FMV and the purchase price.
Example:
• Grant/Purchase Date FMV: $50 per share
• Actual Purchase Price: $30 per share
(As given on 40% Discount)
• Number of Shares: 100
You already paid tax on the $20 difference per share ($50 FMV – $30 purchase price). Therefore, when selling these shares, the cost basis is the FMV of $50 per share.
Calculation:
• Total Cost Basis: $50 (FMV) * 100 (shares) = $5,000
• Selling Price (assume): $70 per share
• Total Sale Proceeds: $70 * 100 = $7,000
Capital Gain: $7,000 (sale proceeds) – $5,000 (cost basis) = $2,000Ensure to use the FMV as the cost basis to avoid double taxation on the same income.
