ESPP sell strategy help

[ajka]

Hi There,

I have over $20K PHG (current price $26.46) stock accumulated in ESPP over last 4-5 yrs. My got stock price is price between $16-$36.

company is doing good to but I want to move to selling immediately in future and do 10% contribution for max benefit.

Just wondering what should be my option to sell

1. Sell all together immediately
2. Sell oldest one first
3. Only sell which have gains

I would appreciate any help and suggestion.

Thanks,
AJ

[Bob's not my name]

Sell everything with gains now (part will be capital gain, part will be ordinary income). Sell everything with losses on Jan 2 so you can use them to offset only ordinary income.

[winger]

Might not be enough info here as the decision may also partly depend on your tax bracket and your company's ESPP rules.

For ESPP, a couple things that may apply:

1. There is a difference between qualified and non-qualified ESPP sales. Depends on your plan what the distinction is, but the classification will impact how much gain is treated as capital gain and how much as regular income. You will need to know each ESPP purchase batch offering/purchase prices/dates as well as the discount amount and plan requirements for qualified.

2. Selling ESPP at a loss within a month of your scheduled ESPP purchases will trigger wash sale rules. So if your plan is set to purchase more shares for you at the end of this year, a wash sale of your losers now will be triggered. This is not a big deal if you don't mind an additional detail to track, but be aware of it.

3. Also, be aware of cases where your ESPP has a lower purchase price than the offering price, ie the stock fell during the ESPP purchasing period. For my ESPP plan, it was better for me tax-wise to sell non-qualified shares than to let them become qualified.

[ajka]

Sell everything with gains now (part will be capital gain, part will be ordinary income). Sell everything with losses on Jan 2 so you can use them to offset only ordinary income.

Thanks for your response.

May be very dumb question, why shouldn't I sell loosing position this year and winning position next year? I'm sure there is reason but just don't know why.

If I plan to sell winning position this year, should I also be worried about AMT?

[ajka]

Thanks winger.

[grabiner]

Sell everything with gains now (part will be capital gain, part will be ordinary income). Sell everything with losses on Jan 2 so you can use them to offset only ordinary income.

Thanks for your response.

May be very dumb question, why shouldn't I sell loosing position this year and winning position next year? I'm sure there is reason but just don't know why.

If you have more than $3000 in capital losses in 2012, you can only deduct $3000 from your ordinary income, and anything beyond that is carried over to 2013 and offsets capital gains. Thus selling the losers this year and the winners next year is the best strategy if your loss is $3000 or less (or close to $3000); otherwise, you'll waste some of the capital loss on offsetting low-taxed capital gains instead of high-taxed ordinary income.

If I plan to sell winning position this year, should I also be worried about AMT?

I don't think so. AMT would cause incentive stock options to be taxed when they are granted, but Fairmark's guide to the AMT doesn't say anything about different tax treatment of the ESPP discount. (You might be affected indirectly by AMT because you changed your income; the marginal AMT tax rate on capital gains is 22% if you are in the phase-out of personal exemptions.)

[Bob's not my name]

May be very dumb question, why shouldn't I sell the losing position this year and the winning position next year? I'm sure there is a reason but just don't know why.

My reasoning (in the absence of any specific information on whether a single-year sale will put a portion in the next tax bracket, or whether you are in a credit phaseout that makes your 2012 effective bracket quite high), is that using losses to offset ordinary income is more valuable in future years and recognizing gains is better in 2012, because both ordinary income rates and the long term capital gains rate are going up next year. So recognizing gains this week seizes the last chance at low LTCG rates, and recognizing losses next week allows the use of $3,000 of losses per year against higher ordinary income tax rates in future years. Example:

$6,000 of losses and $6,000 of LTCG (portion of gain that will be taxed as ordinary income is actually irrelevant to the choice)

(1) Losses in 2012 offset $3,000 of 2012 ordinary income taxed at 25% and $3,000 of 2013 LTCG taxed at 20%. $3,000 of remaining gains in 2013 are taxed at 20%. Net tax effect = (0.20*$6,000)-(0.25*$3,000)-(0.20*$3,000) = $1,200 - $750 - $600 = -$150

(2) Losses in 2013 offset $3,000 of 2013 and 2014 ordinary income taxed at 28%. Gains in 2012 are taxed at 15%. Net tax effect = (0.15*$6,000)-(0.28*$6,000) = $900 - $1,680 = -$780

[ajka]

Thanks for great explanation. That make sense.Really appreciate the help.