When should I sell my shares from my ESPP?

[cathy63]

Quote:

Originally Posted by Dean56 What I meant to say here is: My Mega Corp lets me buy ESPP shares at a 15% discount. If I turn around and sell those shares in less than 24 months, I have to pay ordinary tax on the 15% discount + any capital gains. If I sell after 24 months, I only pay tax on the capital gains.

The rules you describe do not conform to the tax law for a qualified ESPP. See section 423(c) of the Internal Revenue Code here: https://www.law.cornell.edu/uscode/text/26/423

Your company may have some other type of plan that they call an ESPP.

[F.I.R.E User]

Quote:

Originally Posted by cathy63 The rules you describe do not conform to the tax law for a qualified ESPP. See section 423(c) of the Internal Revenue Code here: https://www.law.cornell.edu/uscode/text/26/423 Your company may have some other type of plan that they call an ESPP.

What are other types of plan?

[Philliefan33]

At my Megacorp, we were allowed to buy a limited number of shares at 15% discount on a particular day. We had to hold those shares for more than one month. We paid regular income tax on the value of the 15% discount. In fact, they withheld it from our paycheck.

If/when the shares were sold we paid ST or LT capital gains. The holding company never kept track of the true basis of the shares. They always reported the basis as the price we paid and never included the 15%. For example if stock traded for $100 on the day we bought, we paid $85 and the holding company recorded $85 as the basis. However, we had $15 per share booked as regular wages and paid the resulting income tax. So when I sold the shares I reported the basis as $100 to avoid being double taxed.

[ownyourfuture]

Quote:

Originally Posted by cathy63 The rules you describe do not conform to the tax law for a qualified ESPP. See section 423(c) of the Internal Revenue Code here: https://www.law.cornell.edu/uscode/text/26/423 Your company may have some other type of plan that they call an ESPP.

Section 423(c) pertains to stock 'options'
I could certainly be wrong, but I don't think a ESPP (at least not the one I participated in) is considered to be a type of option.
Employee stock purchase plans tend to be viewed as a benefit while stock options are a form of compensation. ... Your ESPP will have set offering and purchase periods, while a stock option grant has a set term in which you can exercise the options after they vest.

It is you who decides whether to participate in your company's ESPP (depending on the employee eligibility provided by your company's type of plan). With a stock option plan, the company decides whether you participate.

https://www.mystockoptions.com/conte...ck-option-plan


Here's how mine worked.

A % of your choosing, is held every week. On the last trading day of the 1/4 the total amount is used to purchase shares at a 15% discount.

In my case, we had to hold them a minimum of 2 years. Hypothetical: At the end of the 1/4, $1000 has been withheld from my check. The last day of the quarter, shares close at $35.31 Subtract 15% and my purchase price is $30.01
1000 divided by $30.01 = 33.32 shares purchased.

If 2 years later, shares were trading at $40.01 & I chose to sell, I'd have LTCG of $333.13
I only sold shares one time. I'm guessing that was around 2007. I think I sold 75 shares. I've never used anything more than TurboTax deluxe, and it seems like I got through it OK. Of course things could've changed since then.

More information on taxes & ESPP if anyone's interested.

https://www.hrblock.com/tax-center/i...se-plan-taxes/

https://turbotax.intuit.com/tax-tips...lans/L8NgMFpFX

[cathy63]

Quote:

Originally Posted by ownyourfuture Section 423(c) pertains to stock 'options' I could certainly be wrong, but I don't think a ESPP (at least not the one I participated in) is considered to be a type of option.

Yes, the tax code uses the same terminology for shares you buy through an ESPP as it does for stock options. The title of section 423 is "Employee stock purchase plans", and that entire section lays out the rules for ESPP plans. E.g. open to all employees, max $25K per year, max 15% discount, etc.

Quote:

Originally Posted by ownyourfuture Employee stock purchase plans tend to be viewed as a benefit while stock options are a form of compensation. ... Your ESPP will have set offering and purchase periods, while a stock option grant has a set term in which you can exercise the options after they vest. It is you who decides whether to participate in your company's ESPP (depending on the employee eligibility provided by your company's type of plan). With a stock option plan, the company decides whether you participate. https://www.mystockoptions.com/conte...ck-option-plan Here's how mine worked. A % of your choosing, is held every week. On the last trading day of the 1/4 the total amount is used to purchase shares at a 15% discount. In my case, we had to hold them a minimum of 2 years. Hypothetical: At the end of the 1/4, $1000 has been withheld from my check. The last day of the quarter, shares close at $35.31 Subtract 15% and my purchase price is $30.01 1000 divided by $30.01 = 33.32 shares purchased. If 2 years later, shares were trading at $40.01 & I chose to sell, I'd have LTCG of $333.13 I only sold shares one time. I'm guessing that was around 2007. I think I sold 75 shares. I've never used anything more than TurboTax deluxe, and it seems like I got through it OK. Of course things could've changed since then. More information on taxes & ESPP if anyone's interested. https://www.hrblock.com/tax-center/i...se-plan-taxes/ https://turbotax.intuit.com/tax-tips...lans/L8NgMFpFX

The plan you describe here is a typical ESPP, but I think you may be misremembering the tax consequences of selling. The tax rules haven't changed since 2007, and both the articles you linked to do point out that you owe ordinary income tax on the bargain element of the sale even after 2 years. Your employer would have reported this compensation automatically on your W-2, so you might not have noticed that it was there.

TTax Deluxe doesn't handle ESPP sales, so it will just treat them as regular stock sales. The IRS also doesn't know which sales are for ESPPs, so they don't reject or flag the return. You just end up paying more tax than you have to (unless you are in the situation of not owing LTCG tax due to having low income).

[ownyourfuture]

Quote:

Originally Posted by cathy63 The plan you describe here is a typical ESPP, but I think you may be misremembering the tax consequences of selling. The tax rules haven't changed since 2007, and both the articles you linked to do point out that you owe ordinary income tax on the bargain element of the sale even after 2 years. Your employer would have reported this compensation automatically on your W-2, so you might not have noticed that it was there. TTax Deluxe doesn't handle ESPP sales, so it will just treat them as regular stock sales. The IRS also doesn't know which sales are for ESPPs, so they don't reject or flag the return. You just end up paying more tax than you have to (unless you are in the situation of not owing LTCG tax due to having low income).

I appreciate the correction/reply, unfortunately, I don't understand ?

In the 1st paragraph, you state that I owe ordinary income tax on the bargain element (15%) even after 2 years. In the 2nd paragraph you mention that TT deluxe doesn't handle ESPP sales, so it will just treat them as regular sales.

I understand the following example wouldn't be (kosher)

If I sold ESPP shares this year, used TT deluxe next year & just entered them as regular 'stock sales' how would I end up paying more tax than I have to ?

If it's relevant to the situation, I retired in 2015 so I no longer receive a W-2.

[F.I.R.E User]

Quote:

Originally Posted by Philliefan33 At my Megacorp, we were allowed to buy a limited number of shares at 15% discount on a particular day. We had to hold those shares for more than one month. We paid regular income tax on the value of the 15% discount. In fact, they withheld it from our paycheck. If/when the shares were sold we paid ST or LT capital gains. The holding company never kept track of the true basis of the shares. They always reported the basis as the price we paid and never included the 15%. For example if stock traded for $100 on the day we bought, we paid $85 and the holding company recorded $85 as the basis. However, we had $15 per share booked as regular wages and paid the resulting income tax. So when I sold the shares I reported the basis as $100 to avoid being double taxed.

There should not be taxes on the $100 but on $85 because of the 15% discount right?

[F.I.R.E User]

Quote:

Originally Posted by ownyourfuture Section 423(c) pertains to stock 'options' I could certainly be wrong, but I don't think a ESPP (at least not the one I participated in) is considered to be a type of option. Employee stock purchase plans tend to be viewed as a benefit while stock options are a form of compensation. ... Your ESPP will have set offering and purchase periods, while a stock option grant has a set term in which you can exercise the options after they vest. It is you who decides whether to participate in your company's ESPP (depending on the employee eligibility provided by your company's type of plan). With a stock option plan, the company decides whether you participate. https://www.mystockoptions.com/conte...ck-option-plan Here's how mine worked. A % of your choosing, is held every week. On the last trading day of the 1/4 the total amount is used to purchase shares at a 15% discount. In my case, we had to hold them a minimum of 2 years. Hypothetical: At the end of the 1/4, $1000 has been withheld from my check. The last day of the quarter, shares close at $35.31 Subtract 15% and my purchase price is $30.01 1000 divided by $30.01 = 33.32 shares purchased. If 2 years later, shares were trading at $40.01 & I chose to sell, I'd have LTCG of $333.13 I only sold shares one time. I'm guessing that was around 2007. I think I sold 75 shares. I've never used anything more than TurboTax deluxe, and it seems like I got through it OK. Of course things could've changed since then. More information on taxes & ESPP if anyone's interested. https://www.hrblock.com/tax-center/i...se-plan-taxes/ https://turbotax.intuit.com/tax-tips...lans/L8NgMFpFX

I get 15% per share. Can't sell the shares before 1 year period (Fidelity won't let me either, it will give the exact # of shares that I am eligible to sell).

[F.I.R.E User]

Quote:

Originally Posted by cathy63 Yes, the tax code uses the same terminology for shares you buy through an ESPP as it does for stock options. The title of section 423 is "Employee stock purchase plans", and that entire section lays out the rules for ESPP plans. E.g. open to all employees, max $25K per year, max 15% discount, etc. The plan you describe here is a typical ESPP, but I think you may be misremembering the tax consequences of selling. The tax rules haven't changed since 2007, and both the articles you linked to do point out that you owe ordinary income tax on the bargain element of the sale even after 2 years. Your employer would have reported this compensation automatically on your W-2, so you might not have noticed that it was there. TTax Deluxe doesn't handle ESPP sales, so it will just treat them as regular stock sales. The IRS also doesn't know which sales are for ESPPs, so they don't reject or flag the return. You just end up paying more tax than you have to (unless you are in the situation of not owing LTCG tax due to having low income).

ESPP sales do get reported on W-2.

[F.I.R.E User]

Quote:

Originally Posted by ownyourfuture I appreciate the correction/reply, unfortunately, I don't understand ? In the 1st paragraph, you state that I owe ordinary income tax on the bargain element (15%) even after 2 years. In the 2nd paragraph you mention that TT deluxe doesn't handle ESPP sales, so it will just treat them as regular sales. I understand the following example wouldn't be (kosher) If I sold ESPP shares this year, used TT deluxe next year & just entered them as regular 'stock sales' how would I end up paying more tax than I have to ? If it's relevant to the situation, I retired in 2015 so I no longer receive a W-2.

At certain AGI there is no tax on shares of ESPP. The tax form does show the cost basis.

[Philliefan33]

Quote:

Originally Posted by F.I.R.E User There should not be taxes on the $100 but on $85 because of the 15% discount right?

No taxes on the $85.

The $15 discount would be reported as regular income on my W-2. (So if my salary for the year was $100,000, Box 1 of the W-2 would be $100,015).

Think of it this way: I used $85 of my own money to buy the stock. The stock was valued at $100 on the day I bought it. The company paid the remaining $15 on my behalf. That $15 is taxable compensation.

If I sold the stock for $100, I had no capital gains, so no additional income tax. If I sold for more than $100, I paid the required capital gains tax on x-100.

[F.I.R.E User]

Quote:

Originally Posted by Philliefan33 No taxes on the $85. The $15 discount would be reported as regular income on my W-2. (So if my salary for the year was $100,000, Box 1 of the W-2 would be $100,015). Think of it this way: I used $85 of my own money to buy the stock. The stock was valued at $100 on the day I bought it. The company paid the remaining $15 on my behalf. That $15 is taxable compensation. If I sold the stock for $100, I had no capital gains, so no additional income tax. If I sold for more than $100, I paid the required capital gains tax on x-100.

I do have to pay 15% discount tax too in my W-2. Makes sense.

[cathy63]

Quote:

Originally Posted by ownyourfuture I appreciate the correction/reply, unfortunately, I don't understand ? In the 1st paragraph, you state that I owe ordinary income tax on the bargain element (15%) even after 2 years. In the 2nd paragraph you mention that TT deluxe doesn't handle ESPP sales, so it will just treat them as regular sales. I understand the following example wouldn't be (kosher) If I sold ESPP shares this year, used TT deluxe next year & just entered them as regular 'stock sales' how would I end up paying more tax than I have to ? If it's relevant to the situation, I retired in 2015 so I no longer receive a W-2.

Say you purchased shares that were worth $100 on the offering date for $85, so you received a $15 discount. Then you sold those shares for $200 in 2007. Your employer added $15 per share to your wages on your W-2, so you paid ordinary income tax on that money. Your broker sent you a 1099-B that said your cost basis was $85, because that's what you paid for it when you acquired it. You used TTax Deluxe which treats the ESPP sale as a regular sale, so you reported the $85 basis and paid long term cap gains tax on $115 per share. The $15 was taxed twice, as both ordinary income and as part of the long term cap gains. That's how you paid too much tax (unless your income was low enough that you were in the 0% LTCG bracket.)

If you had used TTax Premier and answered the question about whether this was a sale of employer stock as "yes", then it would have asked for some more info and figured out that the adjusted basis was $100. Then the $15 would only have been taxed once as ordinary income and not included in the LTCG.

If you sell ESPP shares this year, then your former employer will issue a W-2 that shows the 15% discount as your "wages", even though you don't work there any more. As long as the stock is still at the brokerage connected to the employer, the broker will report the sale to them and that will trigger the W-2 to be generated next January. I you transferred the stock to a different broker, then you'll only get a 1099-B, but you are still responsible for reporting the ordinary income and adjusted cost basis correctly.

Hopefully that's all clear. ESPP taxes are complicated!

[ownyourfuture]

Quote:

Originally Posted by cathy63 Say you purchased shares that were worth $100 on the offering date for $85, so you received a $15 discount. Then you sold those shares for $200 in 2007. Your employer added $15 per share to your wages on your W-2, so you paid ordinary income tax on that money. Your broker sent you a 1099-B that said your cost basis was $85, because that's what you paid for it when you acquired it. You used TTax Deluxe which treats the ESPP sale as a regular sale, so you reported the $85 basis and paid long term cap gains tax on $115 per share. The $15 was taxed twice, as both ordinary income and as part of the long term cap gains. That's how you paid too much tax (unless your income was low enough that you were in the 0% LTCG bracket.) If you had used TTax Premier and answered the question about whether this was a sale of employer stock as "yes", then it would have asked for some more info and figured out that the adjusted basis was $100. Then the $15 would only have been taxed once as ordinary income and not included in the LTCG. If you sell ESPP shares this year, then your former employer will issue a W-2 that shows the 15% discount as your "wages", even though you don't work there any more. As long as the stock is still at the brokerage connected to the employer, the broker will report the sale to them and that will trigger the W-2 to be generated next January. I you transferred the stock to a different broker, then you'll only get a 1099-B, but you are still responsible for reporting the ordinary income and adjusted cost basis correctly. Hopefully that's all clear. ESPP taxes are complicated!

Thank's for another detailed reply
I fully understand........finally.

[F.I.R.E User]

Learned a lot here.

[F.I.R.E User]

I used the earnings and invested into Roth IRA FZROX and taxable VTSAX.

[F.I.R.E User]

(003491) All shares are subject to a restriction period per your stock plan rules. Please consult the Cost Basis screen (available via the Positions screen) to determine when your shares will become available. For more information, please refer to your plan rules.

This is what I would get. I have to wait 1 year before I can sell.