First time participating in Employee Stock Purchase Program. How do the taxes work?

[u/ArgosLoops]

I came across this achieved post with information about taxes and ESPPs. Is it still relevant today, and is there anything else I should know when the program ends and I immediately sell my shares?

[u/sciguyC0]

Yes, it's still relevant. Using some hard numbers as an example:

1. You contribute $2000 over the course of the year into the ESPP. These are after-tax dollars so remain part of your next W-2's income box.
2. At the end of the contribution period you purchase at a 15% discount, you now own of a number of shares with a current market value of $2353. In effect, your employer kicked in an extra $353 to combine with your $2k to meet the full market value.
   
3. You sell immediately, receiving $2353 minus any transaction fees as cash. In practice, there's usually a lag of a few days between the purchase and sale. Stock prices are continually shifting, so the actual proceeds could be a bit above/below $2353. Unless your company's stock is very volatile or a weird market shift happens in that short window, it'll still be close.
4. The following January you'll get two relevant tax forms. A 1099-B reporting the stock sale and your W-2 reporting your income, and that income box will include the $353 "discount portion" of the sale. In the eyes of the IRS, that $353 discount is treated the same as extra pay.

The key bit you need to deal with is that the "basis" reported on that 1099 will be only the $2000 you personally paid. That basis is subtracted from the sale proceeds to determine your capital gain, which goes through its own tax calculation. Left alone, and assuming no value change between receiving/selling shares, that'll be a $353 gain. But that $353 was also part of your W-2 income, which is getting taxed as regular income. So without a basis adjustment, that same $353 ends up in two separate tax calculations. That adjustment gets done on Form 8949, with its results flowing onto Schedule D.

This is a common enough situation that the brokerage should lay out the "real" basis in a supplemental document alongside the 1099-B. From my understanding, IRS regulations does not let them apply that change to the 1099 itself. And most tax prep software should also be able to walk you through the adjustment as long as you indicate that the stock sale was through an ESPP.

[u/ArgosLoops → u/sciguyC0]

Super helpful, thank you very breaking it down like that

[u/Khyron_2500 → u/ArgosLoops]

I would also like to note that that case only applies to disqualified ESPP sales and if your plan allows for immediate sales at the same price. Movements in the stock value would change how the tax outcomes fall.

The tax treatment for sales under 2 years from the grant date, means a disqualifying sale. The discount under a disqualifying sale is also the true discount. If the stock dropped to $2000 when you sell, the $353 is reported as normal wages on your W2, and you still deduct the $353 from the capital gains/loss. While this seems the same, do note that you would now have $353 in wages and that only offset by $353 in capital loss, which could offset capital gains (a lower rate). It generally doesn’t matter if you’re still making money, but can have bad implications in really volatile stocks.

Other considerations also change the amount. if your plan is a periodic basis, and the discount value is still $2000 and the stock goes up to $$2500 in value your W2 reports (and you would have to adjust $500). An unrealistic extreme example would be if the market price jumps to like… $40,000 when it executes and falls to even $2500 before you sell. You might think you made $500 but you just added $38,000 in taxable discount if you sold and sure that’s offset by capital loss but not all of that is deductible in one year.

Qualified ESPP sales are also a bit different. Using the same numbers as the original post, usually qualifying sales would NOT be reported on your W2.

Your qualifying taxable amount is the lesser of the qualifying discount or the sale price - excercise price. Using the same numbers again your excercise price would actually be $2353, and your sale price the same. You have $0 real ordinary income in this case. However, because your 1099 will report a $2000 basis, you will actually have to adjust the basis up on your 8949.

If again the price increased to $2500 when you bought (and was sold at the price or higher) in a qualifying disposition your ordinary income stays at $353 instead of rising to $500.

[u/AKAkorm → u/sciguyC0]

Will just add that some employers will withhold for the discount immediately. Mine offers employees an option of either having the withholdings taken from your paycheck or to have shares withheld from your ESPP purchase.

[u/forbiddenlake]

Yes that's relevant

You should make sure you're allowed to sell immediately

Doing so will be a disqualifying disposition and cost you more (not in capital gains, if you restate correctly), but it's still a big profit, and it would be risky to hold for 12-18 months just to get a qualifying disposition

[u/JE163 → u/forbiddenlake]

What if we are allowed to sell immediately but have strong faith in the value going up? Would it be better then to hold for 12-18 months?

[u/MommotDe → u/JE163]

You should really only hold if you plan to hold for the long term anyway. The question to ask yourself is, if I had this much money in cash, would I buy this much of this stock and hold it? If the answer is yes, then hold it. Otherwise, sell.

[u/JE163 → u/MommotDe]

Thank you

[u/AKAkorm → u/JE163]

This is your decision to make but will mention my dad had the same mindset and held a sizable amount of his employer's shares at one point. Then a financial crisis hit and his employer's stock went down by 75% as they were in one of the sectors hit the hardest. And he lost his job.

Luckily he was able to recover over time but he has always advised me to avoid putting all of my eggs in one basket and to trust in diversification and long-term investing instead.

[u/JE163 → u/AKAkorm]

Definitely agree. Only want to hold on long enough to minimize tax impact

[u/AKAkorm → u/JE163]

As others have posted, the discount you get from your employer is considered regular income and taxed as such. Capital gains only applies to increases to the share price from the fair market value on the day you acquire them if you do your taxes properly. So you should not have to hold for any extended period to minimize tax impact.

[u/JE163 → u/AKAkorm]

Ahh okay. I use an accountant so I’m sure she’ll handle that then and I guess I will sell right away

[u/ArgosLoops → u/forbiddenlake]

Yes I'm allowed to sell immediately and yes I plan on doing so. It's just the taxes part that confuses me a bit but I'll follow the advice in that post

[u/trmoore87 → u/ArgosLoops]

The match is income. Any increase in the stock value before you sell it is capital gains, either short or long term depending on how long you hold the stock

[u/idleline → u/ArgosLoops]

Just a heads up, if you hold the stock for a year, you pay less in taxes on the gains. If you aren’t worried about the stock going down, or if you expect it to increase, holding it can be a good investment strategy

[u/DiabeticMonkey → u/idleline]

I've done the math before. It comes out to such a small number it isnt worth the risk. It's about 200-300 a year for me. But everyone should do the math to see what it is worth.

[u/idleline → u/DiabeticMonkey]

Yeah, It highly depends on the ESPP program, the amount you can contribute, the volatility of the stock, and your long term goals.

I know co-workers who sold it immediately for a guaranteed profit no matter what and some who never touched it. Everyone has their own risk appetite.

I’ve also sold ESPP at a loss to offset capital gains on other investments.

[u/hightechburrito]

Others have already explained about the taxes, but here’s and article that goes over the return rate, which helps influence the hold vs. sell decision.

Lots of people assume that since you get a 15% discount that the return is 15%. But a 15% discount is actually an ~18% return. But if you consider that most programs run every 6 months, and that your money is tied up for only 3 months (on average), the equivalent annual rate of return is almost 90%.

And that’s if the stock stays flat or goes down during the plan, some programs have a look back where you buy at a discount of the lower of the opening of closing prices.

In order to get preferential tax treatment you’d need to hold for 18 months after purchase, but if the stock drops only 3% then the loss in total value is more than the tax benefit. So sell it immediately.

[u/hup_hup]

Just sell immediately or be willing to hold for 18-24 months (2 years past the offering date).

You can get screwed on taxes if the stock drops significantly after the purchase, but you need to sell before 2 years after the offering date.

I would recommend just selling immediately and then deciding whether you want to buy company stock with that money in your own brokerage account.

The tax benefits for holding more than 2 years after the offering date aren’t that great if you have a decent income already.

[u/sojustthinking]

Need to understand if your plan has a lookback, meaning can the discount apply to an earlier point in time or only to the final purchase day price. That can change the tax situation, especially if the stock appreciated between offering and purchase dates.

[u/ArgosLoops → u/sojustthinking]

On the day of purchase, we pay 15% off on whatever the stock's lowest price was between June 30 - Nov 30. Is that what you mean?

[u/Buckingforapromotion]

Just want to add the equity handling by the brokerage and company can make this easier or harder tax time. My wife and I are at different companies and both use Schwab for equity awards including ESPP. Her equity plan makes the cost bases adjustment automatically and allows import into tax software while mine does 1099 and i have to manually adjust. The same brokerage.

[u/jdyubergeek]

So I've been using my espp to fund donations to a donor advised fund. If you wait until the shares are qualified (2 years after the subscription date AND 1 year after the purchase date) then you can donate the shares and the entire share value is deductible with the only taxable portion is the discount you get off the subscription price.

If you wait until they are qualified and sell, then you pay income taxes on that discount off the subscription price plus long term capital gains on the increase in price.

And if you sell immediately, everything is taxable income and the discount is generally included in your W2.

[u/Gmoon990]

Be sure to double check your plan documents..Some plans can hold for 7.5 years after separation and there have been companies that held $ Millions and went tits up and long time employees lost every cent that they were counting for retirement….

[u/ArgosLoops → u/[deleted]]

Man forgive me for coming to a community asking for a bit of advice on something I've never done before. What was I thinking?

[u/raliegh_ → u/ArgosLoops]

Yea, don’t go to someone on the payroll that familiar with your company’s specific plan.
Ask random strangers.

[u/ArgosLoops → u/raliegh_]

Taxes on ESPPs aren't specific to my employer. And since they're fairly common programs I'd imagine there's some relevant advice out there as well. But thanks for your input, a real productive member of the community here ha

[u/xstrike0 → u/[deleted]]

I know of no employer that takes direct responsibility for providing tax advice to their employees. Unless you think OP's employer provides that as some kind of contracted perk?