Form 3922: ESPP Spread, Dispositions, and Cost Basis

IRS Form 3922 is the information return your employer issues after you buy shares through a Section 423 employee stock purchase plan, and it holds the exact dates and prices you need when you eventually sell those shares. The reason it matters: your brokerage’s Form 1099-B almost always reports the wrong cost basis for ESPP shares, and without the figures on Form 3922, you’ll pay tax twice on the same income — once as wages on your W-2 and again as a capital gain.

What the Form Reports and When It Arrives

Your employer or its transfer agent files Form 3922 with the IRS whenever it transfers stock to you under an ESPP that qualifies under Section 423 of the Internal Revenue Code.¹ The form records the purchase event only. It says nothing about when or whether you later sell.

You should receive your copy by January 31 of the year after the stock was transferred to you.² Stock purchased in August 2025 triggers a Form 3922 that should arrive by January 31, 2026. You won’t need it until you sell, but file it away the moment it shows up. Reconstructing the numbers later is possible but tedious.

Form 3922 does not replace Form 1099-B. The 3922 documents what you paid and what the stock was worth when you bought it. The 1099-B documents what you received when you sold it. You need both to report the sale correctly.

What Each Box Means

Five numbers do all the work. Everything else on the form is identifying information for you and your employer.³

Box 1 — Date option was granted. The start of your ESPP offering period. One of the two holding-period clocks begins here; you need to hold the shares at least two years from this date to get favorable tax treatment.
Box 2 — Date option was exercised. The day the stock was actually purchased and transferred to you. The second clock starts here; the holding requirement is at least one year from this date.
Box 3 — Fair market value per share on the grant date. What one share was worth on the Box 1 date. This figure feeds the ordinary income calculation for qualifying sales.
Box 4 — Fair market value per share on the exercise date. What one share was worth on the Box 2 date, when you actually bought. This is the key figure for a disqualifying sale.⁴
Box 5 — Exercise price paid per share. What you actually paid, reflecting your plan’s discount and any lookback. This is the starting point for your cost basis.

Boxes 6 through 10 carry your employer’s name, address, and EIN, plus your name, address, and Social Security number. The IRS uses these to match your employer’s filing to your return.

How the Discount and Lookback Create the Taxable Spread

Most Section 423 plans let you buy stock at up to a 15% discount to fair market value.⁵ That alone builds in a gain the moment you purchase. Many plans go further with a lookback provision: your price is based on the lower of the stock price at the start of the offering period (Box 1) or at the end (Box 2), with the discount applied to whichever is lower.

Say your offering period opens with the stock at $50 and closes six months later at $70. A 15% discount with lookback prices your shares at 85% of $50, or $42.50. Box 5 shows $42.50, Box 3 shows $50, Box 4 shows $70. The gap between what you paid and what the stock was worth on the exercise date is the spread that drives everything that follows.

Qualifying vs. Disqualifying Dispositions

Your tax bill turns on whether your eventual sale is a qualifying or disqualifying disposition. That depends entirely on how long you held the shares.¹

A qualifying disposition requires you to sell after meeting both holding periods:

At least two years after the grant date in Box 1, and
At least one year after the exercise date in Box 2.

Sell before satisfying either, and the sale is disqualifying. The practical consequence: a disqualifying sale usually pushes a larger share of your profit into ordinary income, taxed at your regular rate rather than the long-term capital gains rate. Long-term capital gains top out at 20%, while ordinary rates run as high as 37%.⁶

Tax Math for a Qualifying Disposition

When you meet both holding periods, the ordinary income you recognize is the lesser of:¹

Your actual gain on the sale (sale price minus Box 5), or
The discount calculated as of the grant date (Box 3 minus the price you would have paid on that date under the plan).

For a typical 15% plan, the second amount equals 15% of the Box 3 value. Your employer adds that ordinary income to your W-2 in the year you sell. Anything above the ordinary income portion is a long-term capital gain.

A worked example using the numbers above. You hold long enough to qualify and sell at $90. Actual gain: $47.50 ($90 minus $42.50). Discount at grant: $7.50 (15% of $50). Ordinary income is the lesser, $7.50. Your adjusted cost basis becomes $50.00 ($42.50 paid plus $7.50 recognized as income). The remaining $40.00 per share is a long-term capital gain.

If the stock fell and you sold below what you paid, you’d recognize no ordinary income and simply report a capital loss.

Tax Math for a Disqualifying Disposition

Sell before meeting the holding periods and the calculation changes. Your ordinary income equals the full spread at purchase: Box 4 minus Box 5.³ There’s no lesser-of comparison. The entire built-in gain from your discount and lookback is taxed as compensation.

Same numbers, disqualifying sale at $90. Ordinary income: $27.50 per share ($70 minus $42.50). That goes on your W-2. Your adjusted cost basis becomes $70.00. The remaining $20.00 gain is a capital gain, short-term or long-term depending on whether you held for more than a year after the Box 2 exercise date.

Compare the two cases. Qualifying: $7.50 per share hits your W-2. Disqualifying: $27.50 per share does. The difference is why the holding periods exist.

Fixing the Cost Basis on Form 8949

This is where most people overpay. Your brokerage sends a Form 1099-B showing sale proceeds and a cost basis, but the basis is almost certainly just the Box 5 exercise price. It does not include the ordinary income already on your W-2. Enter the 1099-B figures straight onto your return and you’ll pay capital gains tax on income you already paid ordinary income tax on.

You report the sale on IRS Form 8949 and use an adjustment to correct the basis.⁷ The columns work like this:

Column (a): Description (company name and number of shares).
Column (b): Date acquired, taken from Box 2 of Form 3922.
Column (c): Date sold, from Form 1099-B.
Column (d): Sale proceeds exactly as reported on Form 1099-B.
Column (e): Cost basis exactly as reported on Form 1099-B, even though it’s low.
Column (f): Adjustment code B, which tells the IRS the reported basis is incorrect.⁸
Column (g): The adjustment amount as a negative number, reducing your taxable gain by the ordinary income already on your W-2.⁷

Take the disqualifying example. The 1099-B shows basis of $42.50. Your correct basis is $70.00 once you add the $27.50 of W-2 income. You’d enter ($27.50) in column (g). Skip that adjustment and you’d pay tax on $47.50 of capital gain instead of the correct $20.00. The totals from Form 8949 flow to Schedule D.⁹

Multiple Lots

If your plan purchases shares every six months, you’ll accumulate multiple lots, each with its own grant date, exercise date, FMV figures, and basis. When you sell only some of your shares, which lot you’re selling changes the tax result.

Brokerages default to first-in, first-out. You can usually specify particular lots through the broker’s website or by phone before the trade settles. Choosing strategically lets you control whether a sale is qualifying or disqualifying and which basis applies. You’ll need the Form 3922 for each offering period to identify the lot and run the right calculation, and each sale may need its own line on Form 8949.

If You Never Received Form 3922

Employers sometimes miss the deadline, and former employees who’ve moved may never receive the form. You still have to report the sale correctly. A few options:

Contact your former employer’s HR or payroll department. They’re required to have the data and can reissue.
Check your brokerage account. Many ESPP brokerages (Fidelity, Schwab, Morgan Stanley) post Form 3922 data online under tax documents.
Reconstruct the figures. If your W-2 breaks out the ordinary income component (often in Box 14), add that to the basis on the 1099-B to reach the correct adjusted basis. Historical stock prices for the grant and exercise dates are publicly available.

Not having the form doesn’t excuse you from reporting or from making the basis adjustment.

How Long to Keep It

Keep every Form 3922 for at least three years after you file the return reporting the sale of those shares. The IRS recommends keeping property-related records until the limitations period expires for the year of disposition.¹⁰ Because you may hold ESPP shares for years before selling, that means keeping the form throughout the holding period plus three years after. If you underreport income by more than 25%, the IRS has six years to audit, so longer retention is safer.

Store Form 3922 with the matching Form 1099-B and a written record of your basis calculation. When the IRS questions an adjustment three years later, pulling up the math quickly is what turns a five-minute answer into a five-minute answer.

1
Office of the Law Revision Counsel. 26 USC 423 – Employee Stock Purchase Plans
2
Internal Revenue Service. 2026 Publication 1099 – General Instructions for Certain Information Returns
3
Internal Revenue Service. IRS Form 3922 – Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)
4
Internal Revenue Service. Instructions for Forms 3921 and 3922
5
eCFR. 26 CFR 1.423-2 – Employee Stock Purchase Plan Defined
6
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
7
Internal Revenue Service. Instructions for Form 8949
8
Internal Revenue Service. Form 8949 Codes
9
Internal Revenue Service. 2025 Schedule D (Form 1040)
10
Internal Revenue Service. How Long Should I Keep Records