Form 3922

When an employee buys company shares through an ESPP (employee stock purchase plan), Form 3922 documents the original purchase price and fair market value on the grant date—the twin anchors that determine whether a later sale qualifies for favourable capital-gains treatment.

Why Form 3922 matters for tax treatment

An ESPP offers employees a discount—often 10–15% off the fair market value at purchase. The IRS treats this discount as compensation income, but the amount of that income, and when you report it, depends on whether your shares later meet the “qualifying disposition” criteria.

Form 3922 is your proof of the dates and prices you need. Without it, the IRS and your tax-return preparer have no official record of your actual purchase price or the FMV at purchase—the exact figures that determine your cost basis and your holding periods.

The two dates that define everything

Form 3922 records the grant date (when the offering period begins) and the purchase date (when shares are actually allocated to you). These dates are not the same. A typical ESPP has a six-month or twelve-month offering window. If you start an offering on January 1, you might not purchase until June 30 or December 31.

The spread between these two dates matters because the IRS has rules about how long you must hold the shares after purchase to qualify for long-term capital gains rates. You must hold them at least one year from the purchase date and two years from the grant date. Form 3922 gives you both anchors.

Understanding the two FMV figures

Form 3922 shows two fair-market values. The first is the FMV on the grant date (the start of the offering period). The second is the FMV on the purchase date (when you bought the shares). The difference between these two is part of what determines your taxable income when you eventually dispose of the shares.

If the stock price has risen sharply between grant and purchase, that built-in appreciation is income you owe tax on—not now, but when you sell. If the stock has fallen, you still get a discount, but your compensatory income is smaller.

Filing Form 3922 with Schedule D

When you sell ESPP shares, you use Schedule D (or Form 8949) to report the capital gain or loss. You’ll reference the purchase price, the sale price, and the holding period—all of which Form 3922 establishes.

If you meet the qualifying-disposition requirements (two years from grant, one year from purchase), your gain is taxed at long-term capital gains rates. If you don’t, any gain is short-term, taxed as ordinary income. The ESPP discount itself (the difference between purchase price and FMV at purchase) is also ordinary income—but that’s typically reported separately by your plan on a W-2 or supplementary statement, not on Form 3922 itself.

Holding Form 3922 for the long term

The IRS requires you to keep records that prove your basis and holding period for at least three years after you file the return reporting the sale. Form 3922 is that record. Many brokers and plan administrators keep these documents for years, but you should retain your own copy as well.

If you have multiple ESPP purchases—say, one in January and another in July—you’ll have a separate Form 3922 for each purchase. When you sell shares, you must track which purchase lot they came from (using specific identification or FIFO) and apply the correct Form 3922 to each lot.

Common pitfalls with Form 3922

One frequent mistake is treating all ESPP shares the same. If you’ve accumulated shares from multiple offerings, each offering has its own grant and purchase dates. Selling from the wrong lot—or not tracking which lot you sold—can accidentally trigger short-term-gains treatment when you qualified for long-term rates.

Another trap: assuming the purchase discount is income on Form 3922 itself. It’s not shown there; the form is purely a record of prices and dates. The compensation income shows up elsewhere (usually a W-2 addition or a separate ESPP income statement from your plan), but the Form 3922 is the documentary evidence that supports the amounts.

Finally, not all ESPPs are Section 423 plans. Some are non-qualified arrangements. If your ESPP is non-qualified, Form 3922 may not apply—your plan will issue different documentation. Always check with your plan administrator about which rules govern your arrangement.

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