Filing Your Tax Forms After Selling Your Employee Stock Purchase Plan (ESPP) Shares Morgan Stanley has prepared the following information to assist you in understanding the tax consequences involved when selling shares from an ESPP. Included are sample forms and an explanation of the information for reporting the sale of these shares on your individual income tax return for. Please retain all forms sent to you by Morgan Stanley to use when preparing your tax return. Morgan Stanley and its affiliates do not provide tax or legal advice. You should, therefore, seek tax advice based on your particular circumstances from an independent tax advisor of your choosing. Where do I get the information I need? Forms How to Obtain Questions? Q. What information do I need to file my tax return? A. The following pages describe the information you will need when you prepare your individual income tax return (Form 1040). Assemble the following forms when you are ready to prepare your tax return: Your Purchase Confirmation Form Form W-2, Wage and Tax Statement from your employer Morgan Stanley s Form 1099-B IRS Form 8949: Sales and Other Dispositions of Capital Assets Schedule D (Form 1040): Capital Gains and Losses Purchase Confirmation Form (or equivalent information from your account, see next page for example) Form 1099-B Form W-2 IRS Form 8949 Schedule D (Form 1040) This is mailed to your home at the time of your original purchase. Morgan Stanley will also post this to your stock plan account online. Morgan Stanley sends this to you by February 15th* of the year following that in which the disposition occurs. Morgan Stanley will also post this to your stock plan account online. Your company will send this to you. Visit your local IRS office or call (800) TAX FORM. You may also obtain this form via the Internet at www.irs.gov. Visit your local Internal Revenue Service (IRS) tax office or call (800) TAX FORM. You may also obtain this form via the Internet at www.irs.gov. * The Energy Improvement and Extension Act of 2008 changed the due date for providing Forms 1099 to recipients to February 15th. Call Morgan Stanley s Customer Service Department at the toll-free number provided on the Tax Reporting Statement (Form 1099-B). Call Morgan Stanley s Customer Service Department at the toll-free number provided on the Tax Reporting Statement (Form 1099-B). Call your company s payroll department. Call your local IRS office or consult your tax advisor. Call your local IRS office or consult your tax advisor.
Q. WHAT IS A QUALIFIED 423 PLAN AND HOW DOES IT WORK? A. A Qualified 423 plan is considered a taxqualified plan by the IRS if it is administered according to the regulations set out in Section 423 of the U.S. Internal Revenue Code and your company explicitly states it is intended to qualify under the Code. This allows participants to benefit from special tax considerations if shares are held at least two years from the grant date offering period and one year from the acquisition of the shares. Sales after this time are identified as qualified dispositions, whereas sales during this time are identified as disqualifying dispositions. Compensation income for 423 plans is not taxed until the year of sale. Q. WHAT IS A NON-QUALIFIED PLAN AND HOW DOES IT WORK? A. A Non-qualified plan is the term used for any other ESPP that is not structured and administered as a Qualified Section 423 plan. These plans do not receive any special tax consideration, and compensation income on discounted Non-qualified plans is taxed the year shares are purchased. The following example reflects a salary of $45,000 and an acquisition of 200 shares of ABC Company stock. The exhibits will show you where you can find the information you need to prepare your individual tax return. These examples will show the results of stock sales for both Qualified Section 423 plans and Nonqualified plans. Step 1 Your compensation income from the purchase of your ESPP shares If your plan does not offer a discount on the purchase of shares, there is no compensation income recognized. For plans that do offer a discount, the amount of compensation income that will be reported is calculated in the table on the right. Exhibit 1 shows the purchase confirmation from Morgan Stanley for a plan with a 12-month offering period, a 6-month purchase period, a 15% discount, and a look back that allows the final discounted purchase price to be based on the lesser of the grant date FMV or purchase date FMV. Your company s plan parameters may differ, however, the sample calculations would use the same fields as the exhibit. Exhibit 1: Purchase Confirmation Form (for illustrative purposes only) The example above is hypothetical and does not reflect the results of an actual purchase. You may instead receive a company-provided confirmation when shares are acquired, depending on your company s preferences. sample 2016 2 Morgan Stanley
Filing Information For Qualified plans, your company will include the total amount of the discount as compensation income on your Form W-2 during the year of the sale (as shown in Exhibit 2). For Non-qualified plans, compensation income is included on your Form W-2 during the year of purchase. This amount will be added to any other income reported by your company to the IRS, as seen in a right. In this example, shares were sold the same year they were purchased, resulting in a disqualifying disposition. The amount of compensation income is determined by using the discount on the date of purchase. Since there is a look back provision, the participant received a discounted purchase price of $30.175 per share when the FMV on the purchase date was $45.50. Compensation income and cost basis are calculated as shown in the Disqualifying Disposition chart. The forms in this guide reflect a disqualifying disposition, so the $3,065 gain realized at the purchase of company stock has been added to the salary of $45,000. Please note that no taxes are withheld by Morgan Stanley at the time of purchase. Exhibit 2: Form W-2 Wage and Tax Statement (for illustrative purposes only) $48,065.00 sample a Qualifying Disposition from Qualifying Dispositions: Lesser of: the amount of the discount based on the grant date Fair Market Value (FMV) multiplied by the number of shares acquired. OR The sales price per share minus the actual price paid per share times the number of shares (or total gain). If the shares were sold after June 1, 2016, it would be a qualifying disposition with compensation income being the lesser of 1) the total discount at grant or 2) the actual gain or loss on the sale (see Exhibit 4). Grant Date Discount Actual Gain (Loss) on Sale $35.50 $30.175 = $5.325 per share $5.325 200 shares = $1,065 compensation income $50.25 $30.175 = $20.075 per share gain ($20.075 200 shares sold) $25 commissions & fees = $3,990 actual gain Cost Basis (Reported on 1099-B) $30.175 200 shares = $6,035.00 The lesser of these two calculations is $1,065, which is what would appear on the Form W-2 as compensation income for a qualified disposition. The compensation income should be considered when calculating adjusted cost basis for Form 8949. Disqualifying Disposition from Disqualifying Disposition: Amount of the discount based on the purchase date FMV multiplied by the number of shares acquired. from Non-qualified plans: Same as a Disqualifying Disposition, only taxable in the year of purchase instead of the year of sale. $45.50 $30.175 = $15.325 per share discount $15.325 200 shares purchased = $3,065 compensation income Cost Basis $45.50 200 shares = $9,100 The example above is hypothetical and does not reflect the results of an actual sale or transaction. 3 Morgan Stanley
Step 2 Capital gains and / or losses Calculate your capital gains a nd/or losses using the appropriate IRS forms. All capital transactions are reported on Form 8949 Sales and Other Dispositions of Capital Assets (Exhibit 3); t he s ubt ot a l s f r om t h i s f or m a r e then carried over to IRS Form 1040 Schedule D Capital Gains and Losses (Exhibit 4), where gain or loss is calculated in aggregate. Exhibit 3: IRS Form 8949 Sales and Other Dispositions of Capital Assts (for illustrative purposes only) e l p m a s Complete appropriate Short-Term or Long-Term section. Check appropriate Box A, B or C, depending on what is provided within either Box 3 or Box 5 on your 1099-B. Sections b, c, d and e should be populated with the amounts from your 1099-B. Section g should include any compensation income associated with the transaction. Definitions The Fair Market Value of your company s stock on the date of grant. This is usually defined as the beginning of the offering period, although your company s plan may differ. grant date fmv: purchase date fmv: The Fair Market Value of your company s stock on the date of purchase. qualifying disposition: A sale of shares from a Qualified Section 423 plan that occurs more than two years after the Grant Date and more than one year after the Purchase Date. disqualifying disposition: Any sale of shares from a Qualified Section 423 plan that occurs before the Qualifying Disposition time period ends. Exhibit 4: IRS Form 1040 Schedule D Capital Gains and Losses (for illustrative purposes only) e l p m a s Part I corresponds with Part I of Form 8949. The totals from Form 8949 are to be carried over to Schedule D. The example above is hypothetical and does not reflect the results of an actual sale or transaction. 4 Morgan Stanley
Questions & Answers Q. HOW CAN I DETERMINE MY CAPITAL GAIN OR LOSS ON SHARES SOLD? A. Please refer to Step 2 of this brochure. Q. WHAT IF MY PLAN DISCOUNT IS GREATER OR LESS THAN 15%? A. A different discount will affect the total compensation income, however, the method for calculating the total as shown in Step 1 remains unchanged. Q. WHAT IS THE COST (TAX) BASIS OF SHARES I OBTAINED THROUGH AN ESPP? A. The term cost basis refers to the original value of an asset for tax purposes (usually the purchase price), adjusted for wash sales, stock splits, dividends and return of capital distributions. In the case of selling shares from an ESPP, adjusted cost basis is calculated by adding the per share purchase price of the stock to the compensation income per share of the stock (if any). The cost basis will differ depending on the nature of the disposition. Please refer to Step 1 for more details. The cost basis is used to determine capital gain or loss when an asset is sold or disposed of. In accordance with reporting requirements, Morgan Stanley will report the purchase price, or original cost basis, not the adjusted cost basis, for the tax year. We will also include adjustments for wash sales, in compliance with the regulatory requirement. As shown on Exhibit 5 you can find b Cost or other basis on your 1099. Any additional compensation as a result of the transaction must be reported on Form 8949. Q. CAN I FILE A FORM 1040EZ OR FORM 1040A WITH A FORM 8949 AND A SCHEDULE D FOR A YEAR IN WHICH I SOLD STOCK? A. No, you are not permitted to file a Form 1040EZ or Form 1040A for a year in which you have sold any stock. Form 8949 and Schedule D must be attached to Form 1040. Q. HOW ARE THE GRANT DATE AND PURCHASE DATE FMVS DETERMINED? A. Please refer to your company s plan documentation for the exact date and how the price is determined. Q. WHAT IF I NO LONGER WORK FOR THE COMPANY AFTER I SELL THE STOCK? A. The IRS requires a Form 1040 to be filed whenever any stock is sold, regardless of employment status. Exhibit 5: Sample Morgan Stanley Form 1099-B (for illustrative purposes only) sample Note: The example shown in Exhibit 5 is based on one transaction. If you conducted multiple transactions in, you must list each separately on Schedule D. b The Morgan Stanley Advantage For nearly 80 years, Morgan Stanley has been a leader, innovator and resource for successful individuals and their families, as well as corporations, foundations and endowments. Our Financial Advisors work from an extensive knowledge base built on diverse skills, experience, training and professional interests. The Global Stock Plan Services unit of Morgan Stanley has over four decades of experience delivering advice and transaction support to stock plan administrators and participants. We are also a market leader in providing financial solutions to meet the specialized needs of executives, including #1 in 10b5-1 plans. 5 Morgan Stanley
filing your tax forms * Source: Washington Service. Morgan Stanley ranked #1 in 10b5-1 market share from 2005 through 2013. Data from the period 2/1/2005 to 5/31/2009 reflects the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. This data also includes transactions from Morgan Stanley & Co. LLC. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed. Information contained herein is subject to change. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters. Morgan Stanley Smith Barney LLC. Member SIPC. CRC1040556 12/14 CS 8082438 12/14