# Calculating cost basis on ESPP shares in a foreign stock

My wife invests a set amount of her USD paycheck into her
ESPP. Once per month, these funds are deposited, as GBp (I
assume using the exchange rate at the time of the deposit)
into an ESPP account. Once per year these funds are used to
purchase a stock traded on the London Exchange in GBp, at
the lower of the price on the Grant Date or the Purchase
Date, minus 15%. My questions are as follows:

1. I understand that the Bargain Element is treated as
ordinary income and reported in Box 1 of her W-2 if there
was a disqualifying disposition (which there was). So, for
example, if the price on the Grant Date was 500 GBp and the
price on the Purchase Date was 600 GBp, the shares would be
purchased at a price of 500 GBp - 75 GBp = 425 GBp, and we
would have ordinary income of 600 GBp - 425 GBp = 175 GBp
per share purchased. Does this seem correct? I ask because
her W-2 Box 14 did not indicate a disqualifying disposition,
but the amount in Box 1 seems larger by approximately the
amount I calculated would be the Bargain Element.

2. Do I have to determine cost basis on both the stock
transactions and the foreign currency transactions? For
example, there were 12 deposits into the investment account
from using USD to purchase GBp, then some stock was sold and
the proceeds were delivered to us in the form of a check in
USD. Do I have to figure the capital gain/loss on the
foreign currency transaction, as well as the stock
transaction? What about dividends reinvested into the stock
- how do those figure into the foreign exchange cost basis?
For example, say we have 100,000 GBp in the account, then
200 shares of stock are purchased at a discount. Later in
the year, dividends in the amount of 5000 GBp are reinvested
in the same stock garnering an additional 10 shares.
Finally, the stock is sold and proceeds received in USD
(minus commissions and fees). What is my cost basis for the
currency transaction? What is the cost basis for the stock
transaction?

3. And, for additional fun, the company in question, ABC,
was demergered into two separate companies, DEF and GHI. At
the time of the demerger all X shares of ABC were converted
to X shares of DEF and X shares of GHI. I have found from
their website that the cost basis percentage to be used is
40% for DEF and 60% for GHI. Is this just a simple
multiplier once I've determined the cost basis?

Whew! Thanks to anyone that can help with any of these
questions. I've never had such a complicated tax situation,
and am finding it to be a bit of a stimulating mental
exercise.

Jude

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