Equity compensation · Section 423
ESPP Tax Calculator for 2026
Separate wage income from capital gain for a Section 423 employee stock purchase plan sale. Compare qualifying and disqualifying treatment with an adjusted basis that avoids taxing the discount twice.
Quick estimate
Separate ESPP wage income from capital gain
Estimated tax on the sale
$411$2,089 of sale proceeds after modeled federal and state taxOrdinary wage income
$150Capital gain / loss
$1,500Simplified Section 423 estimate. Federal ordinary and capital-gain tax is calculated from the selected filing status, holding period, and income stack; selected-state tax uses the 2026 state schedule. Verify dates, plan terms, Form 3922, W-2 income, commissions, basis, loss limits, and state conformity.
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How this calculator works
ESPP sale proceeds minus the payroll-funded purchase cost is the total economic gain or loss. Tax reporting then splits that amount between ordinary wage income and capital gain or loss.
Disqualifying disposition
In the common simplified case, ordinary income is the purchase-date fair market value minus purchase price, multiplied by shares. That wage income increases basis. Selling below purchase-date FMV can therefore produce both ordinary income and a capital loss.
Qualifying disposition
When the statutory holding periods are satisfied, ordinary income is generally limited to the lesser of the grant-date discount determined under the plan and the actual gain. Remaining gain is generally capital gain. Exact plan option terms matter, especially with a lookback.
Holding period and disposition type are separate inputs
A qualifying Section 423 disposition generally requires holding until the later of two years after grant and one year after transfer. A disqualifying sale may still generate long-term capital gain if shares were held more than one year after purchase but the two-year grant test was missed.
Broker reporting may show purchase cost without the compensation income included on Form W-2. Adding the ordinary income to basis prevents the same spread from being taxed twice.
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Worked example
One hundred shares have a $10 grant-date FMV, $20 purchase-date FMV, $8.50 purchase price, and $25 sale price. In a qualifying disposition with a 15% grant-date discount, ordinary income is $150.
The remaining $1,500 of the $2,500 proceeds is capital gain. In a disqualifying disposition, the purchase-date spread could instead produce $1,150 of ordinary income.
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Questions people ask
What makes an ESPP sale qualifying?
Generally, the sale must occur after the later of two years from grant and one year from stock transfer. Verify dates and plan qualification.
Why can I have ordinary income and a capital loss?
A disqualifying disposition can recognize the purchase-date discount as wages even if the shares later fall. Basis increases by those wages, producing a separate capital loss.
Where is ESPP ordinary income reported?
The employer may report it on Form W-2. If it is not reported there, Publication 525 describes reporting wage income separately.
What is Form 3922?
It reports details of stock transferred under a qualifying Section 423 plan and can help reconstruct grant, purchase, and price information.
Does this model capital-loss deductions?
No. It displays a capital loss but does not turn it into an automatic tax benefit because annual limits, other gains, and carryovers matter.
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Sources and model basis
This calculator is for tax year 2026 — the return filed in early 2027. Rates, brackets, deductions and limits are the ones in force for 2026, including changes enacted during 2026 that apply retroactively to the whole year. It does not estimate any other year.
Published rules and formulas are linked below. Values supplied by the visitor remain scenario inputs, not factual claims.
- IRS Publication 525Employee stock purchase plan ordinary-income and basis rules
- IRS Topic 427: Stock optionsStatutory option overview and reporting forms
- IRS Form 3922Transfer reporting for Section 423 employee stock purchase plans