Calculating Cost Basis ESPP

When purchasing stocks periodically throughout your career through an employer stock purchase plan (ESPP), calculating cost basis can get a little confusing. Stock purchase prices fluctuate with each purchase, so if you purchase stocks weekly through your employer for several years, you have many prices and quantities to track. Current IRS guidelines give you two options for calculating your cost basis. They include the actual cost method and the averaging method. As with all IRS guidelines, they are subject to change, so please verify that current procedures remain the same before signing your income tax return.

Things You'll Need

• Spreadsheet software (or calculator and paper)

Instructions

1. Add all purchase dollar amounts including fees charged for the entire time that you purchased stock through your ESPP. Calculate the quantity of shares of stock that you own. If you own stock in more than one company, you may need to do this for each company.

2. Divide the total dollars spent on the stock by the number of shares of stock that you own. This is the averaging method of calculating cost basis of stocks. If you intend to sell off a few shares, multiply the number of shares you want to sell by the average price per share.

3. Subtract your cost basis from the sales price to determine if you have realized a gain or loss on the sale. Report this on your income tax.

4. Track each purchase, beginning with the first stock purchase, recording the dollars invested and the number of shares purchased. If fees were charged for the purchase, include those in the dollars invested. If you set up a spreadsheet and update it periodically with your stock purchases, this method is not too hard. However, if you have not done this, you will need to go through all of your records. If using spreadsheet software, set up a simple formula dividing the purchase price by the quantity purchased so you have a per share price.

5. Use "First in, First out" FIFO method of calculating the cost of each share when you make a partial sale of stock shares. The first stocks you purchased are the first ones you will sell.
   Subtract your cost basis from the sales price to determine if you have realized a gain or loss on the sale. Report this on your income tax.

Tips & Warnings

• If possible, update your stock purchases in a spreadsheet monthly to eliminate confusion or sorting through years of purchases. Keep all of your stock purchase records for as long as you own your stock and for up to 7 years after disposal of all shares.

• Avoid paying excessive income taxes or income tax penalties. Calculate your cost basis correctly.

Resources

• IRS Publication 551 Basis of Assets