Understanding ESPP Stock and its Manipulation

An employee stock purchase plan allows the worker to buy stock in their company at a reduced price. It is considered compensation and when the shares are bought, you are not required to report them as compensated income.

What you do with those shares will affect how they are to be reported. For instance, if you give your shares as a gift to someone or if you sell them, you will have to report that manipulation. If you should die while you are holding said shares, they may in fact appear on the final tax return.

Dispositions that Don’t Qualify

Any gift or sale of the disposition is considered disqualifying. The only way out of this is if it has been over a year since the shares have been purchased and it longer than two years since the offering period for said stock was in effect. Most ESPP plans have a period of offering of a year or less and even if you hold onto your shares for a year and a few days this still won’t be long enough to circumvent a disqualifying disposition.

As an example, let’s say that the company you work for has a six month ESPP period of offering. You buy you shares and fourteen months later you want to sell them off. This means that it is still a disqualifying disposition even though the shares were held for more than a year. You didn’t hold on to said shares for the two year grace period from when the stocks were offered. In order to steer clear of a disqualifying disposition you would be required to hang onto your shares for at least twenty months or more.

The Difference in Taxes

Even if you have avoided the disqualifying disposition by holding on to your shares for the required time period it may not mean you will not have to report compensation if you decide to sell your shares. This is the major difference between stock options you receive as an incentive and the ESPP plan. Just because you hang on to your shares for a longer period of time doesn’t always mean that the compensation income is eliminated.

The rules can seem a bit hazy when you get down to brass tacks so it is always recommended that before you sell or give away your shares that you speak to a financial expert that can guide you to the right decision. Those with sizeable compensations need to investigate further how they should manipulate their ESPP plan, especially in cases where the price of the stock has declined sharply.

You can do some research on the internet that will allow you to figure out the calculations on your tax responsibility for your particular situation as it relates to ESPP plans. If you feel confident enough that you have the knowledge to make the right decision for your maximum tax benefit, then go right ahead and do so. Those that feel that wading into the waters of financial matters can quickly pull them under should indeed contact a financial specialist so that they make the best decision regarding their tax situation.

3 thoughts on “Understanding ESPP Stock and its Manipulation

  1. Thanks for this! Between this entry and the one on the InvestTalk blog on the same subject I feel prepared to understand ESPP stock…. now I just need to actually understand it…

  2. I am interested in selling some stocks held for several years from an old ESPP. I only want to sell a portion of the holdings. I am not sure what value I can use for the purchase price, as these stocks were purchase at various prices throughout my employment. Does, anyone have the answer? I am assuming it would be FIFO, but I am not sure if I can even obtain the exact purchase prices.

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