ESPP - Optimum Holding Period, Taxes & Fees?

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jakehefty17
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ESPP - Optimum Holding Period, Taxes & Fees?

Post by jakehefty17 » Wed Jul 25, 2018 12:10 pm

Hello Bogleheads,

I've read other posts about this topic, but I figured I would ask for my situation specifically. I work for a Fortune 100 energy company.
I'm in the 24% federal income tax bracket for 2018, 6.65% state income tax. I've started contributing 10% of my income into my ESPP.

Here's some information regarding my quarterly ESPP:

A) When you enroll, you must specify, in a whole percentage from 1% to 10%, the amount of your regular base salary or wages (after applicable withholdings and deductions) paid during the purchase period that you are authorizing your employer to withhold from your pay to purchase shares under the ESPP.

B) The purchase price per share for any purchase period is equal to 90% of the lesser of the closing price on the New York Stock Exchange of a share of Common Stock on the first day of the purchase period or the last day of the purchase period on which the Exchange is open.

C) You can sell your shares any time after they are posted to your ESPP stock account, subject to the Company’s policies on selling securities and insider trading compliance.

D) A transaction fee to cover the costs associated with selling the shares will be imposed by the service provider. As of the date of this prospectus, the transaction fee equals 5 cents per share sold, with a minimum charge of $25 per sale; in addition, there is a standard confirm fee (currently $5.00) and a variable regulatory fee for each sale. These fees are subject to change.

E) Once your ESPP stock account is established under the ESPP, the dividends on the shares of Common Stock in your ESPP stock account will be paid to you in cash by check sent to your address of record by the service provider. You may elect to have the dividends automatically reinvested to purchase additional shares of Common Stock. If you elect the dividend reinvestment alternative, the additional shares will be purchased for you at the market price with no discount. There is a small transaction fee for dividend reinvestment (currently 1.75% of the amount reinvested). This fee is subject to change.

F) If you wish to transfer your shares to another private broker or to a registered account with Company’s transfer agent after the shares have been held in the ESPP for at least two years, Morgan Stanley will make an electronic transfer of book entry shares as you direct. There may be a fee to initiate the transfer to another private broker (this fee is subject to change), but there will be no fee to transfer your shares to a registered account with Company’s transfer agent. The ESPP will not issue stock certificates.
Generally, except in the case of death or divorce, shares may not be transferred out of the ESPP during the two-year period that begins on the first day of the quarter, or purchase period, when you purchased the shares. The purpose of the two-year restriction is to permit the Company to track “disqualifying dispositions” for income tax reporting purposes.

G) If you sell or transfer shares of Common Stock purchased under the ESPP within two years after the first day of the purchase period in which you purchased the stock (a “disqualifying disposition”), you will recognize compensation taxable as ordinary income, called imputed income. Your employer will report the imputed income on your W-2 for the year of sale or transfer in an amount equal to the excess of the fair market value of the stock on the last day of the purchase period in which the stock was purchased over the purchase price for the stock (even if you sell the shares at a loss). Your cost basis in the stock (the purchase price you paid) will be increased by the amount of ordinary income you recognize. In addition, you will recognize capital gain or loss equal to the difference between the price at which you sold the stock and your cost basis for the stock, as so increased.

H) If you sell Common Stock purchased under the ESPP more than two years after the first day of the purchase period in which you purchased the stock, you will recognize compensation taxable as ordinary income in an amount equal to the lesser of:
• the excess (if any) of the fair market value of the stock at the time of the sale over the purchase price you paid; and
• 10% of the fair market value of the stock on the first day of the purchase period.
You must calculate and report the amount of ordinary income on your own federal tax return; it will not be included on the W-2 issued by your employer.
Your cost basis in the stock will be increased by the amount of ordinary income you recognize. The portion of the gain that is in excess of the amount recognized as ordinary income, if any, is taxed as a long-term capital gain. If the stock is sold at a price below the purchase price under the ESPP, the loss will be treated as long-term capital loss.

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Given this information, I'd like to ask your opinions on the following questions:

1) How long would you hold the stock before selling, given the tax implications?

2) Should I consider holding 2 years and transferring to another account to minimize fees? (both upon selling and tax implications)

3) Do you have any other suggestions or comments regarding my ESPP?

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The idea is to transfer this money into a simple ETF portfolio in a taxable account whenever is most advantageous. Like most on this forum I prefer to stay diversified, however I don't mind holding. The fees upon selling are the worst part of the deal which would be nice to avoid, and holding 2 years would get the most preferential tax treatment. Money sitting in the account currently earns 3.26% dividend yield paid quarterly.

Opinions and advice welcomed!

PS - I am maxing out my retirement accounts! Please keep advice tailored to the ESPP.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

FreemanB
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by FreemanB » Wed Jul 25, 2018 12:28 pm

One thing I didn't see in your post is the length of the purchase period. If quarterly, then it is very similar to my ESPP, except I only get a 5% discount on the price on the last day of the purchase. My fees when selling are slightly less though. You should calculate the actual return percentage if you sell the stock immediately, subtracting fees and income tax paid, and calculate the average annual return. For my quarterly purchase period, I actually treat it as a 3-month return although it is technically only an average of about 1.25 months. Delaying the sale may reduce your expenses, but it increases your risk(Stock price could go down, eliminating the discount).

Once you have those numbers, you can decide what you want to do. I personally would capture the gain as soon as possible. That reduces your risk, both in the stock volatility as well as in the concentration in your own company, and gives you the ability to use/invest the money however you prefer. Just think of it as a quarterly(Or whatever period) bonus to your salary.

Jack FFR1846
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by Jack FFR1846 » Wed Jul 25, 2018 12:41 pm

Stock vests. Sell within miliseconds of settled shares. When the stock takes an unexpected 20% dive, you don't care.

(before learning my lesson, I had my shares dive 75%)

Don't let the tax tail wag the dog. I'd rather pay 33% tax on a big gain than 0% tax on a big loss. Having been there, I can say that paying tax on the gain feels really good. Especially when the stock tanks shortly after the sale (had this happen too).
Bogle: Smart Beta is stupid

ryman554
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by ryman554 » Wed Jul 25, 2018 5:29 pm

Jack FFR1846 wrote:
Wed Jul 25, 2018 12:41 pm
Stock vests. Sell within miliseconds of settled shares. When the stock takes an unexpected 20% dive, you don't care.

(before learning my lesson, I had my shares dive 75%)

Don't let the tax tail wag the dog. I'd rather pay 33% tax on a big gain than 0% tax on a big loss. Having been there, I can say that paying tax on the gain feels really good. Especially when the stock tanks shortly after the sale (had this happen too).
Except that world+dog sells when you do. Folks out there always seem to front run it, since I always lose 0.5% or so from the peevest value, and recovers next day. You might want to wait two hours or so if my anecdote is your guide.

FreemanB
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by FreemanB » Wed Jul 25, 2018 6:26 pm

ryman554 wrote:
Wed Jul 25, 2018 5:29 pm
Except that world+dog sells when you do. Folks out there always seem to front run it, since I always lose 0.5% or so from the peevest value, and recovers next day. You might want to wait two hours or so if my anecdote is your guide.
I noticed the same thing several times in a row, where it went up a few hours after I sold. Then one time, I decided to put a high limit on my sale price, to try to capture some of what I"d been seeing. After about half a day, I gave up waiting and sold for about $.50 below the opening price. Now, I don't bother trying to time it anymore. There's no way to tell what's going to happen.

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unclescrooge
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by unclescrooge » Wed Jul 25, 2018 7:16 pm

Jack FFR1846 wrote:
Wed Jul 25, 2018 12:41 pm
Stock vests. Sell within miliseconds of settled shares. When the stock takes an unexpected 20% dive, you don't care.

(before learning my lesson, I had my shares dive 75%)

Don't let the tax tail wag the dog. I'd rather pay 33% tax on a big gain than 0% tax on a big loss. Having been there, I can say that paying tax on the gain feels really good. Especially when the stock tanks shortly after the sale (had this happen too).
+1

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jakehefty17
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by jakehefty17 » Thu Jul 26, 2018 8:37 am

I appreciate the replies!

Generally people tend to sell their ESPP immediately, and I agree it makes sense. Immediate gain is hard to beat. I'm probably overthinking this.

Would it make a difference that I'm 26 years old? I could hold the required 2 years and then sell quarterly thereafter, which would be my entire career if possible. I like the stock in general, love my job, and it would pull dividends at a greater rate than any savings account. I don't really mind the risk, I'm not dependent on the money.

I guess I'm asking if it ever logically makes sense to hold for the duration?
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

FreemanB
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by FreemanB » Thu Jul 26, 2018 9:55 am

jakehefty17 wrote:
Thu Jul 26, 2018 8:37 am
I appreciate the replies!

Generally people tend to sell their ESPP immediately, and I agree it makes sense. Immediate gain is hard to beat. I'm probably overthinking this.

Would it make a difference that I'm 26 years old? I could hold the required 2 years and then sell quarterly thereafter, which would be my entire career if possible. I like the stock in general, love my job, and it would pull dividends at a greater rate than any savings account. I don't really mind the risk, I'm not dependent on the money.

I guess I'm asking if it ever logically makes sense to hold for the duration?
Only if the transaction fees were really steep(Much higher than yours) would it really make sense to hold. All the facts and benefits you listed are just as applicable if you immediately sell and invest somewhere with much less risk. Long term, it isn't the end of the world if you choose not to sell immediately. But just recognize that you are introducing additional risk in doing so, without much extra gain to offset it.

new2bogle
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by new2bogle » Thu Jul 26, 2018 10:03 am

FreemanB wrote:
Wed Jul 25, 2018 6:26 pm
ryman554 wrote:
Wed Jul 25, 2018 5:29 pm
Except that world+dog sells when you do. Folks out there always seem to front run it, since I always lose 0.5% or so from the peevest value, and recovers next day. You might want to wait two hours or so if my anecdote is your guide.
I noticed the same thing several times in a row, where it went up a few hours after I sold. Then one time, I decided to put a high limit on my sale price, to try to capture some of what I"d been seeing. After about half a day, I gave up waiting and sold for about $.50 below the opening price. Now, I don't bother trying to time it anymore. There's no way to tell what's going to happen.
This. Just sell it right away - ESPP is your base pay money and I treat that different than RSUs, which are bonus monies.

a5ehren
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by a5ehren » Thu Jul 26, 2018 10:08 am

+1.

From a BH perspective, you already have a lot of risk tied up in your company by virtue of being dependent on them for your income. Saving some tax money isn't really a reason to further concentrate that risk, along with taking on the general market risk of losing money on the investment.

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jakehefty17
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by jakehefty17 » Thu Jul 26, 2018 11:07 am

Okay, thank you all for your replies.

I'll take the guaranteed 10% or more return and run from now on then.

Cheers!
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

28fe6
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Re: ESPP - Optimum Holding Period, Taxes & Fees?

Post by 28fe6 » Thu Jul 26, 2018 4:01 pm

ryman554 wrote:
Wed Jul 25, 2018 5:29 pm
Jack FFR1846 wrote:
Wed Jul 25, 2018 12:41 pm
Stock vests. Sell within miliseconds of settled shares. When the stock takes an unexpected 20% dive, you don't care.

(before learning my lesson, I had my shares dive 75%)

Don't let the tax tail wag the dog. I'd rather pay 33% tax on a big gain than 0% tax on a big loss. Having been there, I can say that paying tax on the gain feels really good. Especially when the stock tanks shortly after the sale (had this happen too).
Except that world+dog sells when you do. Folks out there always seem to front run it, since I always lose 0.5% or so from the peevest value, and recovers next day. You might want to wait two hours or so if my anecefdote is your guide.

I have also noticed this phenomenon. I still sell instantly, but it definitely seems like you get a bad price every time. Many colleagues wait at least a week before selling. As a medium-sized company with a substantial ESPP program, is it indeed possible or likely that front-running is actually happening?

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