ESPP Stock trades


R

russ

My company had an ESPP employee stock purchase plan last
year and I bought stock. Is there some rule that says if
you sell before 1 year, you will have to pay a capital gains
tax? Can someone explain this? Our stock is trading pretty
high right now and I'm interested in selling it, but I don't
want to pay tax if I don't have to.
 
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A

A.G. Kalman

My company had an ESPP employee stock purchase plan last
year and I bought stock. Is there some rule that says if
you sell before 1 year, you will have to pay a capital gains
tax? Can someone explain this? Our stock is trading pretty
high right now and I'm interested in selling it, but I don't
want to pay tax if I don't have to.
See the very recent thread on this newsgroup called "ESPP
questions."
 
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J

joeu2004

My company had an ESPP employee stock purchase plan last
year and I bought stock. Is there some rule that says if
you sell before 1 year, you will have to pay a capital gains
tax? Can someone explain this? Our stock is trading pretty
high right now and I'm interested in selling it, but I don't
want to pay tax if I don't have to.
You cannot escape paying some tax. And part of the
appreciated stock value may be taxed at ordinary tax
rates and part may be taxed at capital tax rates,
regardless of how long you the stock.

Theoretically, you might reduce your taxes by holding
the stock for 2 years after the grant (offering) date
or 1 year after purchase, whichever is later. But there
is no guarantee that that actually results in reduce
taxes. It depends on how the stock price moves in the
interim.

For example, looking back at 4 years of my ESPP -- with
purchases every 6 months -- it was usually better to sell
the stock as soon as possible after purchase, rather than
hold it for the statutory period. But as they say, "the
past is not indication of the future".

If you are familiar with how stock sales are taxed in
general, the following explanation for ESPP sales might
help.

Generally, you realize ordinary income (compensation),
subject to ordinary income tax (reported as "wages" on
Form 1040), on one of the following amounts, whichever
applies:

1. For disqualifying sales: the difference between the
fair market value (FMV) on the purchase date and the
discounted purchase price.

Note that the purchase-date FMV is always larger.
Your company should tell you the purchase-date FMV.
If not, you can use the daily average on the purchase
date.

2. For qualifying sales: the positive difference, if
any, between the gross sales price and the purchase
price, up to the discount amount (typically 15%) based
on the FMV on the grant (offering) date.

Note that this is __zero__ if the gross sales price
is less than the purchase price.

Also note that the "discount amount" is merely a
dollar limit on how much of the positive difference
is realized as ordinary income. It is the discount
amount, not the discount price. For example, if the
discount is 15% and the grant-date FMV is $100, the
discount amount is $15, whereas the discount price
is $85.

Again, your company should tell you the grant-date
FMV. If not, you can use the daily average on the
grant date. The gross sales price is the stock price
before deducting commissions and fees.

Note that the above makes assumptions about the ESPP
which are typical. Specifically, the above applies to
the common case where the discount price is a discount
rate (typically 15%) applied to the lesser of the
grant-date FMV and purchase-date FMV.

If your ESPP differs from that model, your company should
provide general tax information to help you understand
the tax consequences. (Actually, your company should
provide that information in either case.)

A sale (or other disposition) is "qualifying" if you hold
the stock for __more_than__ the later of: (a) 2 years
after the grant entry date; or (b) 1 year after the
purchase date. That is, at least one day after the
applicable anniversary date.

The adjusted basis of the stock is the purchase price plus
any amount realized as ordinary income (#1 or #2 above).

After that, everything is the same as for normal stock
sales. Specifically ....

As usual, the capital gain/loss is the difference between
the __net__ sales price and the adjusted basis.

(The net sales price is the stock price minus applicable
commissions and fees.)

And as usual, the capital gain/loss is long-term if you
hold the stock for __more_than__ 1 year after the purchase
date. Otherwise, the capital gain/loss is short-term.

(The more accurate statement is: as usual, the capital
gain/loss is treated according to the IRS rules du jour.
For example, Congress had considered a 5-year CG category
recently.)

I hope this helps. I can provide concrete examples, if
you like.
 

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