10 minute read | January.26.2026
For (1) any exercise of an incentive stock option (ISO) during 2025 or (2) transfer during 2025 of a share previously purchased pursuant to a tax-qualified employee stock purchase plan (ESPP), the Internal Revenue Code requires companies to:
Note: Companies may request an automatic 30-day extension of this deadline by filing a Form 8809 with the IRS on or before the applicable filing deadline
Companies must report the first transfer of legal title to any share purchased under an ESPP plan where the purchase price was either:
If shares are put into a brokerage account on behalf of participant, transaction is considered a transfer of legal title. If it is the first transfer of legal title of the shares, it must be reported to the IRS and to the participant.
If shares issued directly to participant or registered in the participant’s name on the company's records, the transaction does not need to be reported to the IRS or to the participant because such transaction is not considered a transfer of legal title.
Companies should speak to their tax adviser if the purchase of shares under an ESPP does not trigger IRS reporting obligations.
Participant information statements may either be delivered or mailed to the participant’s last known address or, if the participant has given his or her consent to receive the statement electronically, provided in electronic format.
To provide statements electronically, companies must:
Returns for ISO and ESPP transactions must be submitted to the IRS on:
To obtain these forms:
Important: Companies are not permitted to print these forms from the IRS website for filing purposes. The IRS only accepts the official forms ordered directly from the IRS.
Participant statements may be provided on Form 3921 (for ISOs) and Form 3922 (for ESPPs) or may be provided using a different format that complies with the substitute form requirements found in IRS Publication 1179. At a minimum, substitute forms will need to contain all of the same information as the actual Form 3921 and 3922. Note that many stock plan administration platforms can provide assistance with the preparation and filing/delivery of Forms 3921 and 3922 or, if desired, substitute statements.
We expect that companies with a limited number of transactions will likely use Forms 3921 and/or 3922 (as opposed to substitute statements) since these forms will need to be prepared and submitted to the IRS in any event. Further, we expect that many companies will deliver the form(s) or substitute statements to their participants, along with a cover letter explaining the form or substitute statement. This is an example of a statement that could be provided with a Form 3921 for ISO transactions and this is an example of a statement that could be provided with a Form 3922 for ESPP transactions.
The IRS requires that a separate Form 3921 or Form 3922 as applicable be filed with the IRS for each transaction (i.e., each ISO exercise is reported on its own form), even if one participant has multiple transactions during the year. If a company provides participants with an information statement that meets the substitute statement requirements, the IRS has indicated that the company may aggregate transactions and provide only one substitute statement to each participant who had multiple transactions during the year.
Certain information must be included in Forms 3921 and/or 3922 (or substitute forms), such as for ESPP transactions, the price per share of ESPP stock transfers. If the exercise price is not fixed or determinable on the date of grant (e.g., the exercise price is the lesser of 85% of the fair market value on the first day of an offering period or 85% of the fair market value on the last day of an offering period), companies must report the exercise price as if the purchase occurred on the grant date (i.e., the first day of the offering period).
Companies must include a unique account number on the form if:
Account number requirements per the IRS:
Even though unique account numbers are only required if a participant has more than one ISO or ESPP transaction in a year, we recommend assigning a number to every ISO and ESPP transaction. We expect that this will be used by the IRS to track/locate transactions and it will be easier to ensure compliance if it is done consistently for all transactions.
Companies that are required to file 10 or more ISO returns or 10 or more ESPP returns to the IRS must file the ISO or ESPP returns, as applicable, electronically through the IRS’ traditional Filing Information Returns Electronically (FIRE) system or the IRS’s newer Information Returns Intake System (IRIS). IRIS is an online portal that allows taxpayers to electronically file information returns for 2022 and later tax years.
To submit through the FIRE system, companies will need to set up a FIRE account through the IRS website and will need a Transmitter Control Code (TCC). If a company is using a stock plan administration firm that will be submitting these returns on the company’s behalf, they will likely use their TCC. If a company is not filing through a stock plan administration firm and/or does not have a TCC, the company must get a TCC by completing an IR Application for TCC, formerly Form 4419, Application for Filing Information Returns Electronically, so that a TCC can be assigned to the company.
Moreover, FIRE TCC holders who submitted their TCC application prior to September 26, 2021 must complete and submit a new application. As the TCC application process may take up to 45 days to process, the company should apply no later than February 14, 2026 (or March 16, 2026, if an extension is obtained) in order to timely file Forms 3921 or 3922 electronically.
To submit returns through FIRE, the company will need to create a submission file that meets the FIRE requirements. These formatting requirements for FIRE are somewhat onerous and, as a result, companies will likely need assistance in creating the submission file due to the formatting requirements (a number of stock plan administration firms are equipped to provide this assistance). While companies are permitted to voluntarily file electronically, most companies with limited transactions will find it more practical to prepare and file paper returns because the process is challenging and potentially involves some cost to prepare the necessary file,.
IRIS offers several advantages over the FIRE system, including a web portal for filings of fewer than 100 returns, real-time error detection for TINs and file formats, the ability to correct individual returns without having to resubmit the filing and year-round testing availability.
To submit through IRIS, companies will need to obtain an IRIS-specific TCC, which is not interchangeable with the FIRE TCC. A FIRE TCC will not work for IRIS and vice versa. Companies must complete an IR Application for TCC to obtain an IRIS TCC. As the TCC application process may take up to 45 days to process, companies should apply no later than February 14, 2026 (or March 16, 2026, if an extension is obtained) to timely file Forms 3921 or 3922 electronically through IRIS.
Additionally, companies will need to establish user accounts through ID.me to access the IRIS portal. Companies may continue to use the existing FIRE system for 2025 Section 6039 returns to avoid the immediate need to establish IRIS accounts and obtain a new TCC. However, companies should be aware that beginning in 2027, FIRE will not be available for electronic submissions.
Participant statements:
IRS returns:
Note: Greater penalties apply for intentional failures to provide statements or file returns.
Please contact any member of Orrick’s Compensation and Benefits Group for further assistance in meeting these information statement and return requirements. If a company uses an external stock plan administrator, the company’s stock plan administrator may also be of assistance as many stock plan administrators have developed specific services to help companies comply with these requirements.
A company must report any ordinary income that an optionee recognizes in connection with a disqualifying disposition of ISO shares during the 2025 calendar year in box 1 of the optionee's 2025 Form W-2. Failure to report this income will prevent a company from taking a deduction for the ordinary income that results from the disqualifying disposition and may subject the company to certain reporting penalties.
A sale of ISO shares before the later of the date which is two years after the date of grant and the date that is one year after the date of exercise is treated as a disqualifying disposition. The ordinary income recognized on a disqualifying disposition is equal to the difference between the ISO exercise price and the lesser of the fair market value of the shares on the date of exercise or the sale price of the shares.
If any person sold ESPP stock during the 2025 calendar year, the company must report in box 1 of the person's 2025 Form W-2 the amount of the purchase price discount (described below), if any, on the ESPP stock and, if the ESPP stock was sold in a disqualifying disposition, any ordinary income that the person recognized when the shares were sold.
The "purchase price discount" is the difference between the fair market value of the shares on the first day of the offering period and the purchase price that would result if the shares were actually purchased on the first day of the offering period. For example, if the purchase price of the ESPP stock is equal to the lesser of 85% of the fair market value on the first day of the offering period and 85% of the fair market value on the last day of the offering period (the purchase date), the purchase price discount is 15% of the fair market value on the first day of the offering period. Failure to report this income will prevent a company from taking a deduction for the ordinary income and may subject the company to certain reporting penalties.
A sale of ESPP stock before the later of the date which is two years after the first day of the offering period or the date which is one year after the purchase date is treated as a disqualifying disposition. The ordinary income recognized on a disqualifying disposition is equal to the difference between the purchase price and the fair market value of the shares on the purchase date.
For additional information, please contact any member of Orrick’s Compensation and Benefits Group.