Employee Stock Purchase Plan
Employee stock purchase plans enable employees to purchase shares of company stock at up to a 15% discount and pay capital gains taxes on the proceeds if held for a certain time period. Employees can contribute via payroll deductions to the ESPP to purchase shares of company stock. There is often a six month “look back” and employees are given a discount on the lowest price of the stock during that period. The offering date is the start of that window and the purchase date is six months after.
If you sell the stock less than a year after purchasing it, you will be subject to ordinary income taxes on the proceeds. If you hold onto the stock at least a year before selling (but less than two years after the offering date), the proceeds will be subject to long-term capital gains taxes, and the discount you received on the shares is subject to ordinary income taxes. If sold at least a year after purchase and at least two years after the offering date, the tax treatment of the discount could be more favorable (depending on the price of the stock on the offering date and the FMV at the time of purchase). It can be confusing, but in order to receive the most favorable tax treatment, shares must be sold no less than two years after the original offering date. Work with your tax professional to determine the specific tax implications for you.
One of the risks with ESPP’s is over-concentration in a single company’s stock. Therefore, it can make sense to have a plan in place for purchasing and eventually selling out of those shares as your shares accumulate.
Individual companies stock option plans may vary. See your companies’ specific plan summary for details. Stock options have the potential to be worth nothing, may be illiquid, restricted from trading, or lack a market in which to trade. There are tax implications from stock options. Payroll taxes, long term capital gains, and ordinary income taxes may apply. Please work with a qualified tax professional for your specific situation. All examples are illustrative in nature and for educational purposes only.
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