Quickfinder pages 7-10 and 7-11

How does an Employee Stock Purchase Plan (ESPP) work?

An ESPP allows employees of a company to purchase a specific amount of stock at a specific price (usually at a discount from the stock’s FMV).  The employee usually elects a certain amount of their salary to be used to purchase the stock during an offering period.  Funds are then withheld from the employee’s salary and used to purchase the stock.  Employers may purchase the stock on any basis they elect, such as quarterly, semi-monthly, etc.

How am I taxed when I sell shares I acquired through an ESPP program?

The tax rules differ on whether the sale is a qualifying or disqualifying disposition.  A qualifying disposition means you held the shares longer than two years from grant date and one year from exercise date.  The grant date is normally the beginning of the offering period but the employee should check with employer to confirm.  The exercise date is the purchase date.

Qualifying Disposition:

               Ordinary income is recognized on the lesser of:

• Sales Price – option price (purchase price)

• FMV at Grant – option price (purchase price)

               Any remaining gain would be taxable as a long-term capital gain. 

Note:  If stock is sold at a loss, no ordinary income is recognized.

Disqualifying Disposition:

• Ordinary income is recognized on FMV on exercise date – option price (purchase price).

• Any remaining gain is short or long-term depending on holding period.

If you sell your shares as part of a disqualifying disposition you may have to adjust the basis reported on your 1099B