Understanding Form 3922: Transfer of Stock Obtained Under an ESOP Plan

Written By:
May 25, 2024

Equity compensation is a well-regarded strategy used by startups to reward key employees by offering them an equity stake. This can be achieved through various stock-based compensation methods, including Employee Stock Purchase Plans (ESPPs), Employee Stock Ownership Plans (ESOPs), and Restricted Stock Awards (RSAs)

Out of these, ESPP is a popular benefit program that enables your employees to acquire company stock at a lower price via payroll deductions. However, for seamless stock option grants through this method, you need to consider several important factors, including Form 3922. It is an integral part of the Internal Revenue Code (IRC) and plays a significant role in the process of granting stock options.

This blog covers the different aspects of Form 3922, including its importance, filing process, important dates, penalties, and record-keeping requirements. 

Book a demo with Qapita

What is Form 3922?

Form 3922 is widely known as the 'Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)'. It is an important tax document to intimate the Internal Revenue Service (IRS) regarding the transfer of stock obtained through an ESPP

This form captures key details about the stock purchase, such as the exercise price, the stock's Fair Market Value (FMV) on the purchase date, and the date on which the employee acquired the shares.

Form 3922 is primarily used for informational purposes only. It is not directly reported on the employee's tax return unless they sell the acquired stock. However, the information provided on Form 3922 is essential for employees to accurately report their stock-related tax liabilities when they sell the shares.

For example, let's consider an employee, Maria, who purchased 100 shares of your startup's stock at a discounted price of $20 per share through an ESPP. The FMV on the purchase date was $25 per share. As Maria acquired the shares at a price lower than FMV, this transaction triggered the need for Form 3922.

If Maria sells the shares at a price higher than the exercise price, she will have a capital gain. Alternatively, on selling the shares at a price lower than the exercise price, she will have a capital loss. Form 3922 features the necessary information to calculate these gains or losses, therefore helping Maria accurately report her stock-related tax liabilities.

Screenshot Form 3922

Understanding Employee Stock Purchase Plan (ESPP)

ESPPs provide employees an opportunity to invest in the company's stock and potentially benefit from any future appreciation in value. ESPPs have been created to foster employee ownership and align their interests with the enterprise's performance. Employees can acquire these plans at a discounted price directly from their payroll, making the entire process a seamless experience.

Tax Implications of Employee Stock Purchase Plans

Participating in an ESPP can have significant tax implications for employees. One key aspect is the 'bargain element,' which represents the difference between the FMV of the stock on the purchase date and the actual purchase price. Form 3922 plays a crucial role in this process. It provides the necessary information to calculate the bargain element and any capital gains or losses from the sale of the shares.

The bargain element is considered ordinary income and is subject to income tax withholding. Additionally, when employees sell the acquired stock, they might need to pay capital gains taxes on any appreciation in value since the purchase date. The holding period of the stock, whether short-term (held for one year or less) or long-term (held for more than one year), can impact the tax treatment of any gains realized from the sale.

The IRS taxes short-term capital gains at higher rates than long-term gains, so understanding the holding period of the stock acquired through an ESPP is essential for employees to plan their tax strategies effectively.

Form 3922 vs. Form 3921

When it comes to tax forms related to stock transactions, it is important to distinguish between Form 3922 and Form 3921. These forms are often confused due to their similar names and purposes, but they serve distinct functions and have unique reporting requirements.

Form 3921 is specifically designed to report transactions related to Incentive Stock Options (ISOs). ISOs are stock options granted to employees with the aim of providing them with a stake in the company. When an employee exercises ISOs, the company is required to report this transaction on Form 3921. This form helps the IRS determine the appropriate taxes due to the employees' exercise of ISOs.

On the other hand, Form 3922 is meant to inform the IRS about the first transfer of legal title of stock acquired through ESPP.  Form 3922 provides details like the date of transfer, FMV of the stock, and the exercise price per share.

The key distinction between Form 3921 and Form 3922 lies in the type of stock transactions they report. Form 3921 focuses on ISOs, while Form 3922 pertains to ESPPs.

Book a demo with Qapita

Importance of Form 3922

Form 3922 serves as a crucial tool in the financial ecosystem of startups. Here’s why:

  • Precise Record-keeping: Form 3922 captures key details about the ESPP transaction, including the stock purchase price, FMV on the grant and exercise dates, and the number of shares acquired. This information serves as the foundation for determining your employees' cost basis, a crucial factor in calculating capital gains taxes.
  • Taxable Income Clarity: The difference between the purchase price and the FMV on the exercise date can trigger a tax event for your employees. Form 3922 helps them understand if they owe ordinary income taxes on this difference.
  • Avoiding Tax Issues: Inaccurate reporting or the absence of Form 3922 can lead to significant tax headaches for your employees later on. The IRS may question the cost basis reported on their tax return, potentially resulting in penalties and adjustments.

Who Must File Form 3922?

Employers' Responsibility

When employees purchase company stock at a discounted price through an ESPP, as an employer, you must report this transaction by issuing Form 3922. You have to submit the form to the IRS and provide a copy of the form to the employee who made the purchase. This dual filing ensures that both the IRS and the employee have accurate records of the transaction.

Employees' Requirement

Employees who receive company stock through an ESPP are also required to keep a copy of Form 3922 for their tax records. Employees need not include the information in this form on their tax returns if they do not sell any of the acquired company stocks. However, having this form is crucial for maintaining accurate records of stock transactions and potential tax implications.

How To File Form 3922?

How to file Form 3922

Here is a step-by-step guide to help you complete and submit Form 3922 efficiently:

Step 1: Gather Required Information

Collect essential details related to the stock transfer. This includes the employee's name, Social Security Number (SSN), stock transfer date, FMV of the stock on the transfer date, and the exercise price per share.

Step 2: Complete Form 3922

Fill out Form 3922 with the gathered information. Ensure accuracy and double-check all entries to avoid errors. Any discrepancy can lead to potential tax issues with the IRS.

Step 3: Distribute Form 3922 to Employees

Provide Copy B of Form 3922 to the employee who acquired company stock through the ESPP. Employees need this form for their tax records.

Step 4: Submit Form 3922 to the IRS

File Copy A of Form 3922 along with Form 1096 (Annual Summary and Transmittal of US Information Returns) with the IRS by February 28, 2024, or April 1, 2024, if filed electronically. Ensure timely submission to comply with tax regulations. You can submit Form 3922 electronically through the IRS's Filing Information Returns Electronically (FIRE) system or by mailing it to the specified address.

Exemption For Form 3922

An exemption can be obtained from the IRS when the original transfer of stock ownership is completed by either: 

  • A non-resident alien employee (as defined in section 7701(b) of IRC), or 
  • Someone to whom your enterprise need not provide a Form W-2 (Wage and Tax Statement).

This exemption is limited to any tax year within the period starting from when the stock option was granted to them and ending when they first acquired ownership of the ESPP shares.

Required Information in Form 3922

Form 3922 includes several data fields that provide essential information for accurate tax reporting. These fields include:

  • Employee's Name, Address, and Tax Identification Number (TIN)
  • Employee's Bank Account Number
  • Company's name, address, and Federal Identification Number
  • Date of the option grant
  • FMV of every share on the grant date
  • Date of the option exercise
  • FMV of every share on the exercise date
  • Exercise price paid per share
  • Number of shares transferred on exercise of an option
  • Date of legal title transfer

Due Date of Form 3922

Meeting the deadlines for IRS Form 3922 is crucial to avoid potential penalties from the IRS. Here is a breakdown of the key dates to remember:

  • Employee Copy (Copy B): You must distribute a copy of Form 3922 (Copy B) to each participating employee by January 31st of the year following the calendar year in which the stock transfer took place. This ensures they have the information readily available for their tax filings.
  • IRS Filing (Copy A): There are two options for filing Copy A with the IRS:some text
    • Paper Filing: If you are filing less than 250 Form 3922s, the deadline is February 28th of the year following the stock transfer.
    • Electronic Filing: This option offers an extension for electronic submissions until April 1st. You must use the IRS FIRE system to submit more than 250 Form 3922s.
  • Deadline Extension: If you encounter unforeseen circumstances that prevent the timely filing of Copy A with the IRS, you can request a 30-day automatic extension by submitting Form 8809. You must file this form by the original due date to be considered valid. 

You can also request an extension in the deadline for providing Copy B of Form 3922 to current or previous employees.

If these dates happen to fall on a holiday, the due dates will be the next day. Missing these deadlines can result in penalties from the IRS. Make sure to factor them into your ESPP administration process to ensure timely compliance.

Important dates regarding Form 3922

What to Do with Form 3922 After Filing?

Once you have submitted Form 3922s, you must store them safely for easy access during tax return filings. Here are some best practices to help you with the process:

  • Maintain Both Digital and Physical Copies: Having both digital and physical backups of Form 3922 and related ESPP documents ensures you can access the information easily when needed. Cloud storage platforms or secure servers are good options for storing digital copies. Keep physical copies at the designated document storage area in the office.
  • Organize All Relevant Documents: Keep all documents related to your ESPP program organized, including plan documents, stock purchase agreements, and any communications with employees. Categorize and label documents for quick retrieval when needed.
  • Review and Update Records Regularly: Review your ESPP records regularly to ensure their accuracy. This might involve necessary changes to the stock plan or employee participation.
  • Comply with IRS Guidelines: The IRS has a general guideline of maintaining records and documents for a minimum of 4 years after filing the tax return. You must stay updated about any updates to IRS regulations that may impact your record-keeping practices.

Penalties For Not Filing Form 3922 

Failing to file Form 3922 or inaccurately submitting it can lead to significant penalties for employers. The IRS imposes fines based on the delay and the accuracy of the information provided. The penalty amount differs for small businesses whose taxable income for the last three years is below an average of $5 million.

  • $60 per form if the filings are 30 days late, up to a maximum of $630,500 per year.  The maximum penalty is $220,500 for small businesses.
  • $120 per form if the filings are made by August 1st, up to a maximum of $1,891,500 per year. The maximum penalty for small businesses in this case is $630,500.
  • $310 per form for failure to file up to an annual maximum of $3,783,000. The penalty for small businesses here is $1,261,000.

If it is established that you have deliberately failed to submit the return or have furnished incorrect information, then the penalty is $630 per statement. There is no capping on the maximum penalty in this case. 

This penalty applies separately to the copies to be submitted to the IRS and to be provided to the employee or ex-employee. If you are unable to provide copies of both, the penalties mentioned above and the maximum capping are both doubled.


Form 3922 plays a pivotal role in the accurate filing of taxes for both employers and employees involved in ESPPs. However, any errors in this form can result in potentially significant penalties and fines from the IRS. Hence, you need to get professional guidance to avoid any such unwanted outcomes.

This is where Qapita, a leading equity management platform, comes into the picture. Rated as the best Equity Management Software by G2, we simplify the management of ownership in companies.

Currently, Qapita supports over 2,200+ fast-growing companies with solutions for equity management, cap table management, and ESPP administration, which help with IRS compliances.

Connect with the experts at Qapita today and learn more about the available services that can streamline your stock option practices. 

Related Blogs

No items found.