As part of the employee stock purchase plan, your employer grants you an option to buy 100 shares of the company’s stock at $20 per share, when the market value was $22 per share.
You later exercise this option, when the market price was $25 per share.
After meeting the holding period requirements (1 year holding the stock and 2 years since the option was first granted), you sold the stock for $23 per share.
Your sales proceeds would be $2,300 (100 shares x $23 per share)
Your purchase price is $2,000 (100 shares x $20 option price per share)
Your gain is $300 ($2,300 proceeds minus $2,000 cost)
You would report $500 as ordinary income in this case: fair market value of $2,500 ($25 x 100 shares) at time option was exercised, less your option price of $2,000 ($20 x 100 shares)
In this case, you would have a capital loss of $(200): selling price of $2,300 minus $2,500 (cost of $2,000 increased by ordinary income of $500)
Restricted Property
If you receive stock or other property from your employer that has certain restrictions, you generally do not include the value in your income until the property is substantially vested. Until it becomes vested, the property still belongs to your employer. This may be the case when your employer transfers shares of the company’s stock to you as compensation, provided you stay with the company for a certain period of time, or meet certain performance goals.
Any income you receive from the property, or your right to use the property would be included in your compensation. Then, when the property is vested, you include its fair market value, less any amount you might have had to pay for it, in your income.