Form 3922 (ESPP)
Form 3922 is the IRS information return that corporations must issue to employees when stock acquired through a qualifying Employee Stock Purchase Plan (ESPP) is first transferred, providing the data employees need to determine income and basis when the shares are eventually sold.
An Employee Stock Purchase Plan governed by IRC Section 423 allows employees to purchase company stock at a discount — typically 5 to 15 percent — through payroll deductions over an offering period. The tax treatment of the resulting income is favorable relative to non-qualifying arrangements, provided the employee holds the shares long enough to achieve a qualifying disposition: the later of two years from the grant (offering) date or one year from the purchase (exercise) date. Form 3922 gives employees the raw data needed to apply the complex ESPP tax rules when the time comes to report a sale.
The form must be furnished to the employee by January 31 of the year following the year of transfer (the actual purchase date, not the sale date) and filed with the IRS by February 28 for paper or March 31 for electronic filing. Key boxes include Box 1 (grant date), Box 2 (transfer date), Box 3 (fair market value per share on grant date), Box 4 (FMV per share on transfer date), Box 5 (exercise price per share), and Box 7 (number of shares transferred). Box 8 optionally shows the exercise price calculated as a percentage of the grant-date FMV.
When the employee eventually sells ESPP shares, the tax treatment depends on whether a qualifying or disqualifying disposition occurs. In a qualifying disposition, ordinary income equals the lesser of (a) the actual gain — sale price minus exercise price — or (b) the discount element computed using the grant-date FMV. Any remaining gain above the ordinary income component is long-term capital gain, taxed at preferential rates. The ordinary income amount is generally not added to the W-2 until the shares are sold in a qualifying disposition, making the Form 3922 data essential for computing the correct income split.
In a disqualifying disposition, the entire spread between exercise price and FMV on the transfer date is ordinary income in the year of sale, and the employer must include it in the employee's W-2. The Form 3922 FMV on the transfer date (Box 4) is the key input for calculating this amount. Basis for gain or loss purposes is then FMV at transfer plus any ordinary income already recognized.
Many employees fail to correctly account for ESPP income because brokers often report the proceeds on Form 1099-B using only the exercise price as cost basis, omitting the ordinary income component that has already been taxed. This results in apparent double taxation unless the employee manually adjusts the cost basis when reporting the sale on Schedule D and Form 8949 using the information from Form 3922.