ESPP Sale Missing From Your Tax Return? What a New Tax Court Case Shows

Last updated: November 6, 2026 · By the Flex Tax and Consulting Group team

If you sold shares from an employee stock purchase plan (ESPP), the sale belongs on your tax return, usually on Form 8949 and Schedule D, even if part of the income also shows up in your W-2. A Tax Court decision released November 4, 2026 (Moiseshyn v. Commissioner, T.C. Memo. 2026-114) shows what happens when it doesn’t: a California couple assumed their ESPP sale was already “in the W-2,” left it off the return, and ended up owing tax on the gain after an IRS matching notice turned into a court case. Here is how ESPP tax works, where reporting goes wrong, and what to do if an IRS notice arrives.

What happened in the Tax Court case

According to published summaries of the opinion, the taxpayers were a California couple. One spouse had bought company stock through an ESPP over several years and sold the shares in 2021. The broker reported the sale on Form 1099-B. Their return, prepared by a paid preparer, left out the sale (and a small amount of dividends and interest) because they believed all employer-related income was already in the W-2 wage figure.

The IRS’s automated matching system found the 1099-B with no matching entry on the return. In early 2024 the IRS issued a notice of deficiency. Before trial, the IRS agreed to a higher cost basis for the shares, which reduced the gain in dispute by roughly $10,000, and it dropped the accuracy-related penalty. The rest of the gain stayed in dispute.

The court ruled for the IRS on the gain. The key points:

• Third-party forms shift the burden. The IRS had the broker’s 1099-B and other information returns, and the taxpayers didn’t dispute their accuracy. That was enough to put the burden on the taxpayers to show the income was already reported.
• No payroll proof. The taxpayers offered no pay stubs, year-end payroll statements or employer records showing the stock gain was inside Box 1.
• “Usually” is not evidence. The plan administrator’s guide said ESPP income would usually be on the W-2, but it also said employees remain responsible for reporting. The court did not treat it as proof.
• Testimony alone wasn’t enough without documents to back it up.

The case is a reminder that a stock sale reported on Form 1099-B needs its own line on your return, and that you need records if you plan to argue it was reported somewhere else.

How ESPP shares are taxed (the short version)

Most ESPPs at public companies are “qualified” plans under Internal Revenue Code section 423. You generally owe no tax when you buy the shares at a discount. Tax is triggered when you sell, and the result depends on how long you held the shares.

Type of sale	Holding period	Ordinary (compensation) income	The rest
Qualifying disposition	Sold more than 2 years after the offering (grant) date and more than 1 year after the purchase date	Generally the lesser of (a) the discount measured at the offering date or (b) your actual gain over the purchase price	Long-term capital gain or loss
Disqualifying disposition	Sold before either holding period is met	The spread on the purchase date: fair market value when you bought minus the price you paid	Capital gain or loss (short- or long-term depending on how long you held after purchase)

Two forms help you sort this out. Form 3922, from your employer, shows the offering date, purchase date, prices and fair market values for each purchase. Your W-2 (often with a Box 14 note or a separate equity statement) may show the ESPP compensation your employer included in wages. Your broker’s Form 1099-B shows the sale. For the IRS’s explanation, see its FAQ on employee stock purchase plans.

Two opposite mistakes we see with ESPP sales

1. Leaving the sale off the return

This is the Moiseshyn mistake. Even when your employer puts the compensation part in Box 1, the sale proceeds and the capital gain or loss are not in your W-2. Every sale on a 1099-B should appear on Form 8949 and Schedule D. If it doesn’t, the IRS’s matching system will likely flag it, and income left off a return stays taxable no matter whose assumption caused the gap.

2. Paying tax twice on the same income

For shares bought in 2014 or later, brokers generally report your cost basis as the price you actually paid, without adding the compensation income already taxed on your W-2. If you copy the 1099-B as-is, the discount gets taxed once as wages and again as capital gain. The fix is a basis adjustment on Form 8949 (adjustment code “B,” for basis shown on the 1099-B that is incorrect), supported by your Form 3922 and payroll records. The AICPA’s Tax Adviser has a good explanation of why this happens.

Notice that in the Tax Court case, the IRS itself agreed the basis was higher than first assumed. Getting basis right can change the result even when the gain is taxable.

If you get an IRS notice about a stock sale

An unreported 1099-B usually shows up first as a CP2000, the IRS’s underreported-income notice. According to the IRS, a CP2000 is not a bill. It is a proposal to change your return based on information returns. It also has a response date: generally 30 days from the notice date (60 days if you live outside the U.S.).

1. Don’t ignore it. If the IRS doesn’t hear from you, it sends a statutory notice of deficiency. From there, the main way to dispute the tax before paying is a Tax Court petition, which generally must be filed within 90 days.
2. Check the math before agreeing. CP2000s for stock sales often treat the full proceeds as gain, or use the broker’s unadjusted basis. Your actual tax may be lower.
3. Gather the records the court asked for. Form 3922 for each purchase, the W-2 and any Box 14 or equity-compensation statement, final pay stubs or a year-end payroll summary, and the broker’s supplemental statement with adjusted basis.
4. Respond with documents, not just a statement. Moiseshyn shows that saying “it was in my W-2” without payroll proof is unlikely to work.
5. Remember California. If a federal change increases your California tax, the FTB says you must report it within six months of the final federal determination.

Notices about equity compensation tend to involve several years of purchases, multiple forms and state follow-up. If one has already arrived, our IRS notice and audit representation team can review it with you before the response date.

A simple habit for every ESPP sale

Before you file, line up three documents for every sale: the 1099-B, the Form 3922 for those shares, and your W-2 detail. Confirm that (1) the sale is on Form 8949, (2) any compensation income is either in your W-2 wages or reported separately, and (3) the basis includes that compensation so it isn’t taxed twice. Keep those records with your return. For a broader look at selling company stock, see RSU vs ESPP: Selling RSUs or ESPP Shares Without Overpaying the IRS.

FAQ

Is ESPP income included in my W-2?

Often the compensation part is, but not always, and the sale itself never is. Check your W-2 detail, Box 14 or your employer’s equity statement. The capital gain or loss from the sale is reported separately on Form 8949 and Schedule D.

How is an ESPP taxed when I sell?

For a qualified (section 423) plan, part of the gain may be ordinary income and the rest capital gain. The split depends on whether the sale is a qualifying or disqualifying disposition, which turns on the 2-year-from-offering and 1-year-from-purchase holding periods.

Why is the cost basis on my 1099-B too low for ESPP shares?

For shares acquired in 2014 or later, brokers generally report only what you paid, without the compensation already taxed as wages. You adjust the basis on Form 8949 so that income isn’t taxed twice.

What is Form 3922?

It is the statement your employer sends after an ESPP purchase showing the offering date, purchase date, prices and fair market values. You don’t file it, but you need it to figure basis and whether a sale is qualifying.

I got a CP2000 for a stock sale. Do I just pay it?

Not before checking it. A CP2000 is a proposed change, and stock-sale notices often overstate the gain. You can agree, partly agree or disagree with supporting documents, but respond by the date on the notice.

Related reading

• RSU vs ESPP: Selling RSUs or ESPP Shares Without Overpaying the IRS
• RSU Taxes 101: How Restricted Stock Units Are Taxed
• California Equity-Based Compensation Guidelines: Moving From CA to Other States

Sources

Last reviewed November 6, 2026.

• Moiseshyn v. Commissioner, T.C. Memo. 2026-114 (Nov. 4, 2026), as summarized in Current Federal Tax Developments (Nov. 5, 2026)
• IRS: FAQ on employee stock purchase plans (holding periods, ordinary income, Form 3922)
• IRS: Topic No. 652, Notice of underreported income (CP2000)
• IRS: Form 8949 adjustment codes (code B)
• California FTB: IRS changed your federal tax return
• The Tax Adviser: Change in cost basis reporting can result in double counting of income

This article provides general information only and is not tax or legal advice. Tax outcomes depend on individual facts and circumstances. Contact us about your specific situation.