What are downsides of ESPP @ 15% discount ?

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confusedinvestor
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What are downsides of ESPP @ 15% discount ?

Post by confusedinvestor » Sat May 19, 2018 11:36 am

What are the downsides of ESPP when you can get a 15% discount on lesser of share price of 1st month and end of 6th month and immediately sell at 15% discount at next day with short term cap gain ?

Disadvantages of this 'immediate' ESSP ? -- 1. Short term tax impact, 2. Tx cost for Sell (not buy), 3. $$ tied up for 6 months, 4. company stock can drop > 15% next day once purchase, 5. i forget to sell next day 6. seems-complex to get 15% on ESPP contribution - tax - tx costs...

Thoughts ? Anyone here does this ?

PFInterest
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Re: What are downsides of ESPP @ 15% discount ?

Post by PFInterest » Sat May 19, 2018 11:39 am

its just cost to sell if any.
and STCG rate
but otherwise if you can sell immediately and put into an otherwise indexed taxable account I would do it for 15% off.

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DaftInvestor
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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Sat May 19, 2018 11:40 am

It's practically money in the bank but not 100% risk free. Tha only additional item that isn't in your list that I know of is if you are subject to a blackout period that prevents you from selling after purchase. (Example - you get involved in a major upcoming event such as a merger or acquisition and can't sell since you have insider info).
I don't look at taxes as a downside - you make your extra money so you pay your taxes on it.
To add: I would do your plan without hesitation. - have made a lot of extra income over the years with ESPP plans.
Last edited by DaftInvestor on Sat May 19, 2018 11:44 am, edited 1 time in total.

airborne
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Re: What are downsides of ESPP @ 15% discount ?

Post by airborne » Sat May 19, 2018 11:43 am

The terms you've described sound like one of the better ESPPs out there. Really, the only downside risk is that the shares will fall in value before you have a chance to sell them, but it's highly unlikely they'd fall enough to wipe out your entire 17.6% return. The discount is taxed as income, and the costs to sell should be less than $100.

If you can handle the cash flow reduction for the initial six month period, I don't see a reason not to participate.

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Re: What are downsides of ESPP @ 15% discount ?

Post by Jack FFR1846 » Sat May 19, 2018 11:49 am

As you defined it, where it can sell at vest, there's no downside.

Taxes? I'd rather pay tax on "no work" profit than give up the profit.

My ESPP is better than you list where I can specify the sale at vest ahead of time and it sells miliseconds after it's given to me.
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Mitchell777
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Re: What are downsides of ESPP @ 15% discount ?

Post by Mitchell777 » Sat May 19, 2018 12:00 pm

I don't see much downside. I did this for years although I held mine for 2 years+ to get the LTCG. It worked for me since the stock price generally rose, but it adds risk.

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jharkin
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Re: What are downsides of ESPP @ 15% discount ?

Post by jharkin » Sat May 19, 2018 12:51 pm

I have the same type of plan. There is no downside, short of the stock price crashing massively on the day the offering closes...

Just put in a sell @ market order before market open the day the shares release, take the money and run :)

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Top99%
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Re: What are downsides of ESPP @ 15% discount ?

Post by Top99% » Sun May 20, 2018 8:03 am

Jack FFR1846 wrote:
Sat May 19, 2018 11:49 am

Taxes? I'd rather pay tax on "no work" profit than give up the profit.
I have a hard time convincing some of my coworkers of this. I always offer to pay the taxes for them if they hand me the 15% profit.
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Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Mon May 21, 2018 8:43 am

jharkin wrote:
Sat May 19, 2018 12:51 pm
I have the same type of plan. There is no downside, short of the stock price crashing massively on the day the offering closes...

Just put in a sell @ market order before market open the day the shares release, take the money and run :)
Yes, and every single time the ESPP stock has this nasty ilttle habit of dropping -- just a little bit -- at market open and recovering during the day. It's not much, but it is really annoying.

It's almost as if somebody out there knows that there is going to be this bolus of stock being sold at market open and reacts accordingly.

I suspect you are generally better off selling at noon (or even 10am) on the day shares release instead of doing it at market open. But that would take work, and I'd prefer to grouse instead....

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David Jay
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Re: What are downsides of ESPP @ 15% discount ?

Post by David Jay » Mon May 21, 2018 9:10 am

There will be little risk if you sell lots on a rotating basis. Even if one period has a loss (i.e. stock down more than 15%), the other periods will be profitable if you stay with it.

Just don't:
1. Accumulate the stock or
2. Quit the program after the first down period - that locks in a permanent loss.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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David Jay
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Re: What are downsides of ESPP @ 15% discount ?

Post by David Jay » Mon May 21, 2018 9:14 am

If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: What are downsides of ESPP @ 15% discount ?

Post by Beehave » Mon May 21, 2018 9:50 am

Is the company long-term stable and growing?

If not, maybe start looking elsewhere for employment. Your long-term security is infinitely more important than a couple of money-making trades a year.

If the company is stable and growing, why not hold onto stock you are buying at a minimum of 15% off? This is a way to accumulate wealth.

If you are really concerned that in a string of purchases spread in 6 month intervals there will be multiple 15% or greater drops exactly on the dates of purchase, maybe the stock market is not the right place for you.

I'd really suggest you think about long-term goals and not fret about daily fluctuations. You will do much better if you act on auto-pilot. If for you this means buying and holding, or accumulating and selling periodically, or selling immediately upon purchase, then just do it. If you worry and try to micro-manage to the last penny you will spend way too much time, experience unnecessary frustration, and probably achieve worse results.

Best wishes - - - my recommendation is to buy and hold if the company is good. It is a path to accumulation of wealth.

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Re: What are downsides of ESPP @ 15% discount ?

Post by David Jay » Mon May 21, 2018 10:21 am

Beehave wrote:
Mon May 21, 2018 9:50 am
Is the company long-term stable and growing?

If not, maybe start looking elsewhere for employment. Your long-term security is infinitely more important than a couple of money-making trades a year.

If the company is stable and growing, why not hold onto stock you are buying at a minimum of 15% off? This is a way to accumulate wealth.

If you are really concerned that in a string of purchases spread in 6 month intervals there will be multiple 15% or greater drops exactly on the dates of purchase, maybe the stock market is not the right place for you.

I'd really suggest you think about long-term goals and not fret about daily fluctuations. You will do much better if you act on auto-pilot. If for you this means buying and holding, or accumulating and selling periodically, or selling immediately upon purchase, then just do it. If you worry and try to micro-manage to the last penny you will spend way too much time, experience unnecessary frustration, and probably achieve worse results.

Best wishes - - - my recommendation is to buy and hold if the company is good. It is a path to accumulation of wealth.
I strongly disagree, for several reasons:
1. It is not possible to see the future with enough clarity to determine if your current employer will be a great company in 30 or 40 years. All one has to do is google the "Nifty 50" to see all of the "great companies" that have become mere shadows of their former selves, or disappeared completely. Just one example from the Nifty 50: Kodak
2. There is excess exposure when both your income and your portfolio are dependent on the performance of same company. I would not hold those shares past 1 year. I work for a 100% ESOP company, I always diversify the maximum possible amount at the earliest possible date (with our plan, we are eligible to diversify a portion of our holdings at age 55, 60 and 65). Not because I think there is an issue with the company but because any other course of action is imprudent.
3. Diversification is the one true "free lunch" in investing. Single-company risk can be eliminated by holding broad-based index funds. No other risk can be so completely removed at essentially no cost.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: What are downsides of ESPP @ 15% discount ?

Post by Waba » Mon May 21, 2018 2:35 pm

David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.

If you hold on to it for a year and then sell you need to be aware that if you sell at a loss, the vesting of new ESPP shares within 30 days of your sale may turn it into a wash sale. Not the end of the world, but it's a pain to keep track of the modified cost basis.

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Re: What are downsides of ESPP @ 15% discount ?

Post by Waba » Mon May 21, 2018 2:53 pm

confusedinvestor wrote:
Sat May 19, 2018 11:36 am
What are the downsides of ESPP when you can get a 15% discount on lesser of share price of 1st month and end of 6th month and immediately sell at 15% discount at next day with short term cap gain ?

Disadvantages of this 'immediate' ESSP ? -- 1. Short term tax impact, 2. Tx cost for Sell (not buy), 3. $$ tied up for 6 months, 4. company stock can drop > 15% next day once purchase, 5. i forget to sell next day 6. seems-complex to get 15% on ESPP contribution - tax - tx costs...

Thoughts ? Anyone here does this ?
I participate in an ESPP like this and it's very good risk/reward. Free money basically. My ESPP plan allows me to schedule the sale of the stock in advance, so there is no risk of forgetting and the sales commission is only a few bucks.
On average your contribution is tied up for 3 months at a time (some of it is tied up for 6 months, some of it for only a week or so) and you get _at least_ a 15% return twice per year. The only downside is that my ESPP plan does not allow me to participate with more than 5% of my salary.

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Re: What are downsides of ESPP @ 15% discount ?

Post by David Jay » Mon May 21, 2018 3:01 pm

Waba wrote:
Mon May 21, 2018 2:35 pm
David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.
Well explained, I withdraw my suggestion...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: What are downsides of ESPP @ 15% discount ?

Post by Beehave » Mon May 21, 2018 4:47 pm

David Jay wrote:
Mon May 21, 2018 10:21 am
Beehave wrote:
Mon May 21, 2018 9:50 am
Is the company long-term stable and growing?

If not, maybe start looking elsewhere for employment. Your long-term security is infinitely more important than a couple of money-making trades a year.

If the company is stable and growing, why not hold onto stock you are buying at a minimum of 15% off? This is a way to accumulate wealth.

If you are really concerned that in a string of purchases spread in 6 month intervals there will be multiple 15% or greater drops exactly on the dates of purchase, maybe the stock market is not the right place for you.

I'd really suggest you think about long-term goals and not fret about daily fluctuations. You will do much better if you act on auto-pilot. If for you this means buying and holding, or accumulating and selling periodically, or selling immediately upon purchase, then just do it. If you worry and try to micro-manage to the last penny you will spend way too much time, experience unnecessary frustration, and probably achieve worse results.

Best wishes - - - my recommendation is to buy and hold if the company is good. It is a path to accumulation of wealth.
I strongly disagree, for several reasons:
1. It is not possible to see the future with enough clarity to determine if your current employer will be a great company in 30 or 40 years. All one has to do is google the "Nifty 50" to see all of the "great companies" that have become mere shadows of their former selves, or disappeared completely. Just one example from the Nifty 50: Kodak
2. There is excess exposure when both your income and your portfolio are dependent on the performance of same company. I would not hold those shares past 1 year. I work for a 100% ESOP company, I always diversify the maximum possible amount at the earliest possible date (with our plan, we are eligible to diversify a portion of our holdings at age 55, 60 and 65). Not because I think there is an issue with the company but because any other course of action is imprudent.
3. Diversification is the one true "free lunch" in investing. Single-company risk can be eliminated by holding broad-based index funds. No other risk can be so completely removed at essentially no cost.
Let me see if there's a middle ground we are both standing on here. I'm responding to OP who says he or she is confused and appears to be exhibiting trigger-finger tendencies and fretting over the possibility of 15% declines (presumably multiple occurrences of such declines) exactly on the "wrong day." So, my counsel is to consider avoiding stocks if you are really that nervous and emotionally involved, or better, to start out with a more buy-and-hold mentality. Then, presumably if buying and holding, once OP is comfortable that he or she can deal with the daily fluctuations they will be much less confused and can do as they see fit. Also, I'd recommend holding at least long enough to try for a capital gain, rather than ordinary income (I guess depending on tax-bracket).

Regarding holding a nifty fifty stock for 50 years - - okay, I agree, probably not a good idea. If it is a small part of a diversified portfolio, no big deal. Working for and investing in the stock of a solid company with a good stock purchase plan, it is possible to accumulate bunches of stock that can be sold for periodic major purposes (vehicle, home, education). It's a bucket of money. How big it becomes before you trim is a personal matter but I certainly agree with you - - - it should never become so big that a downturn in the company's value will put you at peril.

Just a bit more about buy-and-hold for the OP. Maybe the best thing for the OP would be to sell every six months immediately on purchase. Then, when the stock goes up AFTER selling, maybe the OP will on their own become more comfortable with buy-and-hold. The best learning is through early, very low cost, one or two-time mistakes.

Best wishes.

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DaftInvestor
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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Mon May 21, 2018 5:02 pm

David Jay wrote:
Mon May 21, 2018 3:01 pm
Waba wrote:
Mon May 21, 2018 2:35 pm
David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.
Well explained, I withdraw my suggestion...
And if you did wait to sell you would need to wait longer than a year for gains to be long term since the rule is 1 Year from the purchase and TWO years from the offer period start for ESPP gains to be considered LTCG.

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Re: What are downsides of ESPP @ 15% discount ?

Post by ridebikeseveryday » Mon May 21, 2018 6:06 pm

Beehave wrote:
Mon May 21, 2018 4:47 pm
David Jay wrote:
Mon May 21, 2018 10:21 am
Beehave wrote:
Mon May 21, 2018 9:50 am
Is the company long-term stable and growing?

If not, maybe start looking elsewhere for employment. Your long-term security is infinitely more important than a couple of money-making trades a year.

If the company is stable and growing, why not hold onto stock you are buying at a minimum of 15% off? This is a way to accumulate wealth.

If you are really concerned that in a string of purchases spread in 6 month intervals there will be multiple 15% or greater drops exactly on the dates of purchase, maybe the stock market is not the right place for you.

I'd really suggest you think about long-term goals and not fret about daily fluctuations. You will do much better if you act on auto-pilot. If for you this means buying and holding, or accumulating and selling periodically, or selling immediately upon purchase, then just do it. If you worry and try to micro-manage to the last penny you will spend way too much time, experience unnecessary frustration, and probably achieve worse results.

Best wishes - - - my recommendation is to buy and hold if the company is good. It is a path to accumulation of wealth.
I strongly disagree, for several reasons:
1. It is not possible to see the future with enough clarity to determine if your current employer will be a great company in 30 or 40 years. All one has to do is google the "Nifty 50" to see all of the "great companies" that have become mere shadows of their former selves, or disappeared completely. Just one example from the Nifty 50: Kodak
2. There is excess exposure when both your income and your portfolio are dependent on the performance of same company. I would not hold those shares past 1 year. I work for a 100% ESOP company, I always diversify the maximum possible amount at the earliest possible date (with our plan, we are eligible to diversify a portion of our holdings at age 55, 60 and 65). Not because I think there is an issue with the company but because any other course of action is imprudent.
3. Diversification is the one true "free lunch" in investing. Single-company risk can be eliminated by holding broad-based index funds. No other risk can be so completely removed at essentially no cost.
Let me see if there's a middle ground we are both standing on here. I'm responding to OP who says he or she is confused and appears to be exhibiting trigger-finger tendencies and fretting over the possibility of 15% declines (presumably multiple occurrences of such declines) exactly on the "wrong day." So, my counsel is to consider avoiding stocks if you are really that nervous and emotionally involved, or better, to start out with a more buy-and-hold mentality.
I don't think that follows at all. The OP's concern is very real: in order to take advantage of this part of their compensation plan, there is a very real risk that if things drop on exactly the wrong day, bad things will happen. It might be low probability, but it's not zero. Unfortunately this is the nature of the compensation plan: it is inherently not diversified and carries this risk.

That the OP would be concerned about this risk doesn't imply that they would be trigger happy while well diversified in an unstable equity environment.

carguyny
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Re: What are downsides of ESPP @ 15% discount ?

Post by carguyny » Mon May 21, 2018 7:28 pm

I have a lot of friends that were at Lehman when it went under - many were taking advantage of stock plans, many were granted options as compensation. All of them were out of a job at the worst possible time, when the entire industry was down it was very hard for many of them to find new roles. Some spent 18+ months unemployed trying to find the right role.

This is the downside risk really, you buy the stock and need to sell at the worst possible time. You convince yourself it will recover and it keeps going down. You've probably purchased more thinking you're getting them at a bargain.

I also have friends from Enron, if you want more stories. Also many from GE who can tell a similar tale of what happened.

I've never held more employer stock than what I've been forced to take - for example my comp every year at one role included options. When I left that company, I left them all behind as they were way out of the money (I moved in early 2009, it was a fund manager).

You asked for the downside risk - the big risk is your company goes under or has forced layoffs while you've long the equity. You're out of a job, out of pocket whatever position went to 0 or is way down. Remember in a 50%+ market drawdown year, 6 months is a very longtime for individual companies. For example, WaMu went from $35 to $5 in about 6 months. Many companies restrict/prohibit employee trading during these periods.

I'm a big risk taker, just today I purchased some SPY put options, SMH put options, shorted the SPY as well for a quick gain etc. But I would never willingly buy Employer stock - don't mix your assets (employer stock) with your liabilities (employers obligation to pay you).

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DaftInvestor
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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Mon May 21, 2018 7:47 pm

carguyny wrote:
Mon May 21, 2018 7:28 pm
I have a lot of friends that were at Lehman when it went under - many were taking advantage of stock plans, many were granted options as compensation. All of them were out of a job at the worst possible time, when the entire industry was down it was very hard for many of them to find new roles. Some spent 18+ months unemployed trying to find the right role.

This is the downside risk really, you buy the stock and need to sell at the worst possible time. You convince yourself it will recover and it keeps going down. You've probably purchased more thinking you're getting them at a bargain.

I also have friends from Enron, if you want more stories. Also many from GE who can tell a similar tale of what happened.

I've never held more employer stock than what I've been forced to take - for example my comp every year at one role included options. When I left that company, I left them all behind as they were way out of the money (I moved in early 2009, it was a fund manager).

You asked for the downside risk - the big risk is your company goes under or has forced layoffs while you've long the equity. You're out of a job, out of pocket whatever position went to 0 or is way down. Remember in a 50%+ market drawdown year, 6 months is a very longtime for individual companies. For example, WaMu went from $35 to $5 in about 6 months. Many companies restrict/prohibit employee trading during these periods.

I'm a big risk taker, just today I purchased some SPY put options, SMH put options, shorted the SPY as well for a quick gain etc. But I would never willingly buy Employer stock - don't mix your assets (employer stock) with your liabilities (employers obligation to pay you).
How many of these companies went under on the morning of the ESPP purchase? How many of your friends that were in the habit of immediately selling all ESPP purchases got caught somehow? I don't know a single case and know folks from some of these same companies.
Yes - their is risk in holding company stock - but for ESPP - you are holding it for a day or two at most. And if the company fails prior to the buy - then the buy isn't made.

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Re: What are downsides of ESPP @ 15% discount ?

Post by Beehave » Mon May 21, 2018 7:54 pm

Let's assume the employee is allowed to buy ESPP with 10% of their salary and they're making $80k/yr. They are buying at 15% off of the lower price for the stock 6 months ago or today. So they are getting a min of 15% off, and presumably about half the time, more than that 15% off.

In this scenario each six months they are making a $4k out-of-pocket purchase for stock valued at $4705.88 or possibly any amount more than that.

Would it be best for them to:
(a) make no investment, stay in cash, buy a CD every payday with 10%
(b) buy a total stock market (diversified) mutual fund each payday at par (no discount)
(c) commit to purchase using the ESPP at a minimum of 15% discount using the aggregate sum of 10% of pay aggregated from each paycheck and then applied in two 6 month window-tranches per year?

Obviously, there are potential plusses and minuses for each choice. There are possible scenarios for each in which it is a money-maker and the other two are money-losers. For me, if someone is averse to market risk, then (a) is the right choice. If they are willing to take on market risk, that risk is lower with (c) than (b), and the upside potential is higher with (c) than (b). Remember, some of the purchases of the ESPP stock will be at a very large discount which is what tilts strongly in favor of (c) both for risk and reward.

Whether and how long to hold onto that ESPP stock after purchase is another issue. And regarding holding, absolutely, it is in general much safer to hold a diversified portfolio than a non-diversified one.

My opinion. Not bulletproof. No guarantees. But that ESPP is probably as good a deal (aside from stock options) as anyone gets in the market.

Best wishes.

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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Mon May 21, 2018 8:08 pm

Beehave wrote:
Mon May 21, 2018 7:54 pm
Let's assume the employee is allowed to buy ESPP with 10% of their salary and they're making $80k/yr. They are buying at 15% off of the lower price for the stock 6 months ago or today. So they are getting a min of 15% off, and presumably about half the time, more than that 15% off.

In this scenario each six months they are making a $4k out-of-pocket purchase for stock valued at $4705.88 or possibly any amount more than that.

Would it be best for them to:
(a) make no investment, stay in cash, buy a CD every payday with 10%
(b) buy a total stock market (diversified) mutual fund each payday at par (no discount)
(c) commit to purchase using the ESPP at a minimum of 15% discount using the aggregate sum of 10% of pay aggregated from each paycheck and then applied in two 6 month window-tranches per year?

Obviously, there are potential plusses and minuses for each choice. There are possible scenarios for each in which it is a money-maker and the other two are money-losers. For me, if someone is averse to market risk, then (a) is the right choice. If they are willing to take on market risk, that risk is lower with (c) than (b), and the upside potential is higher with (c) than (b). Remember, some of the purchases of the ESPP stock will be at a very large discount which is what tilts strongly in favor of (c) both for risk and reward.

Whether and how long to hold onto that ESPP stock after purchase is another issue. And regarding holding, absolutely, it is in general much safer to hold a diversified portfolio than a non-diversified one.

My opinion. Not bulletproof. No guarantees. But that ESPP is probably as good a deal (aside from stock options) as anyone gets in the market.

Best wishes.
Good analysis. Also - folks should keep in mind a 15% discount off stock represents a 17.6% immediate gain. The withdrawals are made over a 6 month period so the average dollar is only unavailable to you for other purposes for 3 months. So 3 months with 17.6% gain - this is a 70% annualized gain- with very little risk. I don't know of a better risk/reward trade-off.

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Re: What are downsides of ESPP @ 15% discount ?

Post by freebeer » Mon May 21, 2018 8:22 pm

carguyny wrote:
Mon May 21, 2018 7:28 pm
I have a lot of friends that were at Lehman when it went under - many were taking advantage of stock plans, many were granted options as compensation...

I'm a big risk taker, just today I purchased some SPY put options, SMH put options, shorted the SPY as well for a quick gain etc. But I would never willingly buy Employer stock...
This is illogical. ESPP at minimum 15% gain for 6 months (average much more) is a free lunch like no other. Risk of same-day-as-vesting crash is correlated with your investment of human capital, true, but that risk is infinitesimal. No better place to put your money based on expected return. Even beats 401k beyond employer match.

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Re: What are downsides of ESPP @ 15% discount ?

Post by carguyny » Mon May 21, 2018 8:31 pm

freebeer wrote:
Mon May 21, 2018 8:22 pm
carguyny wrote:
Mon May 21, 2018 7:28 pm
I have a lot of friends that were at Lehman when it went under - many were taking advantage of stock plans, many were granted options as compensation...

I'm a big risk taker, just today I purchased some SPY put options, SMH put options, shorted the SPY as well for a quick gain etc. But I would never willingly buy Employer stock...
This is illogical. ESPP at minimum 15% gain for 6 months (average much more) is a free lunch like no other. Risk of same-day-as-vesting crash is correlated with your investment of human capital, true, but that risk is infinitesimal. No better place to put your money based on expected return. Even beats 401k beyond employer match.
You're correct assuming that people act rationally and stick to their plan when the company has traded off significantly. I'm talking about when people start to accumulate thinking they're getting the company at a bargain. It ends badly, very badly if you're also out of a job. If you 100% stick to it and your company doesn't change the plan (which they generally maintain the right to do) you're correct that my statement is illogical. But people are emotional, get easily swayed when the very smart people around their company start to convince them that holding stock is such a good idea etc. Sure, I have some examples where holding has paid off as well - but OP asked for the risks and the biggest risk is themselves...

tamudude
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Re: What are downsides of ESPP @ 15% discount ?

Post by tamudude » Mon May 21, 2018 8:36 pm

confusedinvestor wrote:
Sat May 19, 2018 11:36 am
What are the downsides of ESPP when you can get a 15% discount on lesser of share price of 1st month and end of 6th month and immediately sell at 15% discount at next day with short term cap gain ?

Disadvantages of this 'immediate' ESSP ? -- 1. Short term tax impact, 2. Tx cost for Sell (not buy), 3. $$ tied up for 6 months, 4. company stock can drop > 15% next day once purchase, 5. i forget to sell next day 6. seems-complex to get 15% on ESPP contribution - tax - tx costs...

Thoughts ? Anyone here does this ?
While not risk free, it is a very good investment with relatively less effort for a 15%+ return. I have greatly benefited from ESPP in my line of work. That being said, you have not mentioned how much you can put in....at my job, we can put in 10% of salary and we buy quarterly with 15% discount on lower of start and end of the quarter with no vesting period. A quick note: the 10% comes out of your net salary which surprises a lot of people. Once you get the ball rolling, it is easy to sell frequently and reduce your reliance on company stock. I highly recommend it since there aren't many places where you can get a rate of return that is (almost :) ) 15%+ without taking on significantly higher risk.

Here is a taxation guide that has served me well: https://communications.fidelity.com/sps ... -click.pdf

Darth Xanadu
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Re: What are downsides of ESPP @ 15% discount ?

Post by Darth Xanadu » Mon May 21, 2018 8:42 pm

Almost no downside. You should take advantage. The tax situation can be convoluted but it's a small price to pay.
"A courageous teacher, failure is."

dcabler
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Re: What are downsides of ESPP @ 15% discount ?

Post by dcabler » Tue May 22, 2018 7:16 am

My current plan is almost exactly the same, except that the period is 3 months instead of 6 months. Previous companies where I've worked had have similar plans.

I always sell as soon as the stocks are in my account. This is "free" money. And I already have enough of my risk tied up by just working for the company - why add more risk by holding stocks in it for any length of time when what I really want to do is diversify? In all of my plans, the only risk is that the stock price will change in the wrong direction by more than the purchase discount between the last day of the quarter and the opening bell of the next trading day when I put the sell order in. Where it might get a little hairy is if it takes your plan a few days extra to get things squared away.

There are a couple of ways I've looked at it.
1. I would have put all of that money into my taxable investment account anyway, so that money already gets nearly guaranteed returns on it before I deposit it. The deposits are just delayed by between 1 and 3 months, effectively.

2. I needed the money that was withheld to live on, so I have to have a 3 month buffer in my account for living expenses. But that's really only for the 1st 3 months I'm ever in the plan. After the first 3 months, I take net gains and save them, and I now have my first 3 months withholdings back to use for the next 3 months buffer.

ryman554
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Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Tue May 22, 2018 8:41 am

DaftInvestor wrote:
Mon May 21, 2018 5:02 pm
David Jay wrote:
Mon May 21, 2018 3:01 pm
Waba wrote:
Mon May 21, 2018 2:35 pm
David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.
Well explained, I withdraw my suggestion...
And if you did wait to sell you would need to wait longer than a year for gains to be long term since the rule is 1 Year from the purchase and TWO years from the offer period start for ESPP gains to be considered LTCG.
You guys might be meaning to say the right thing, but it's coming out unclear.

Let's define three dates:
GRANT date (the start date of the plan period)
PURCHASE date (the end date of the plan period)
SALE date (when you sell the ESPP shares)

1. What DaftInvestor is describing is a "Qualifying Disposition" of ESPP stock. > 2 years from GRANT and 1 year from PURCHASE. In this case, your "W2" income is the lesser of the price of the stock at GRANT or SALE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). This is almost always lower than the 15% discount rate. The rest is a capital gain, and since you held for one year after purchase, is always Long-Term.
2. What Waba is describing is a "Disqualifying disposition" of ESPP stock, which is < 2 years from GRANT or < 1 year from PURCHASE. In this case your "W2" income is the price of the stock at PURCHASE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). In other words at least 15%, no matter what. The rest is capital gain, which can be short term or long term depending on how long you held the stock after PURCHASE.

Folks here, for various reasons, are telling you to forget about going after the qualifying disposition and just sell at first opportunity. It's the lowest risk, highest reward combination out there. Who wouldn't turn down an annualized >60% ROI, risk free? (15% gain for 3 months of holding?)

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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Tue May 22, 2018 10:50 am

ryman554 wrote:
Tue May 22, 2018 8:41 am
DaftInvestor wrote:
Mon May 21, 2018 5:02 pm
David Jay wrote:
Mon May 21, 2018 3:01 pm
Waba wrote:
Mon May 21, 2018 2:35 pm
David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.
Well explained, I withdraw my suggestion...
And if you did wait to sell you would need to wait longer than a year for gains to be long term since the rule is 1 Year from the purchase and TWO years from the offer period start for ESPP gains to be considered LTCG.
You guys might be meaning to say the right thing, but it's coming out unclear.

Let's define three dates:
GRANT date (the start date of the plan period)
PURCHASE date (the end date of the plan period)
SALE date (when you sell the ESPP shares)

1. What DaftInvestor is describing is a "Qualifying Disposition" of ESPP stock. > 2 years from GRANT and 1 year from PURCHASE. In this case, your "W2" income is the lesser of the price of the stock at GRANT or SALE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). This is almost always lower than the 15% discount rate. The rest is a capital gain, and since you held for one year after purchase, is always Long-Term.
2. What Waba is describing is a "Disqualifying disposition" of ESPP stock, which is < 2 years from GRANT or < 1 year from PURCHASE. In this case your "W2" income is the price of the stock at PURCHASE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). In other words at least 15%, no matter what. The rest is capital gain, which can be short term or long term depending on how long you held the stock after PURCHASE.

Folks here, for various reasons, are telling you to forget about going after the qualifying disposition and just sell at first opportunity. It's the lowest risk, highest reward combination out there. Who wouldn't turn down an annualized >60% ROI, risk free? (15% gain for 3 months of holding?)
rymann554 - We weren't saying the same thing and you ALSO missed my point and made incorrect statements above (shown in BOLD). The Capital gain being short term and long term is NOT just dependent purely upon the PURCHASE date (contrary to discussions in these threads and what you stated above) but also based upon the GRANT date. If you don't sell right away (not recommended by Bogleheads) and want the additional gains to be considered Long Term - then you must hold the stock for 1 years past the PURCHASE date and 2 years past the GRANT date contrary to your clarifications above.

Farmboyslim83
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Re: What are downsides of ESPP @ 15% discount ?

Post by Farmboyslim83 » Tue May 22, 2018 1:52 pm

Do you all have a max, that the 15% can be applied to? I do, and it is not very much, which would pretty much negate any value to doing this.

Thanks.

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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Tue May 22, 2018 2:25 pm

Farmboyslim83 wrote:
Tue May 22, 2018 1:52 pm
Do you all have a max, that the 15% can be applied to? I do, and it is not very much, which would pretty much negate any value to doing this.

Thanks.
I currently don't work for a company with a plan but in the past I did. My max at my last company used the IRS Max Yearly limit of $25,000 but personally it takes only a few minutes to sign up and a few extra minutes at tax time - I don't see there being a number too low where it isn't worth the small amount of time to take the free money.

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Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Tue May 22, 2018 2:38 pm

DaftInvestor wrote:
Tue May 22, 2018 10:50 am
rymann554 - We weren't saying the same thing and you ALSO missed my point and made incorrect statements above (shown in BOLD). The Capital gain being short term and long term is NOT just dependent purely upon the PURCHASE date (contrary to discussions in these threads and what you stated above) but also based upon the GRANT date. If you don't sell right away (not recommended by Bogleheads) and want the additional gains to be considered Long Term - then you must hold the stock for 1 years past the PURCHASE date and 2 years past the GRANT date contrary to your clarifications above.
No, you are either incorrect about short/long term gain, or I am misunderstanding what you mean by "additional long-term gains". What I said was factually specific, and correct in all cases. Again, lets' make sure we're talking about the same "additional gains"

In summary:
1. The BASIS of the stock depends on if it is qualifying or disqualifying. It is only qualifying if the ESPP is sold over 1 year after purchase and 2 years after grant date.
2. The W2-INCOME realized is the difference between BASIS and how much you paid to PURCHASE it.
3. The GAIN of the stock is long-term or short-term if HELD over more than a year, and is above the basis, regardless of qualifying or disqualifying distributions.

Which of the points above do you disagree with?
source:
The best one, with pictures (I have had the pleasure of encountering the last scenario!): https://financialgeekery.com/2012/05/15 ... ith-taxes/
https://www.thebalance.com/employee-sto ... ns-3192974
http://fairmark.com/execcomp/espp/qualifying.htm


To reiterate:

Let us say OP sells 366 days after buying ESPP. (>1 year after GRANT date). OP basis in the stock is the purchase date value. OP realizes W2 income for the discount. (15% of purchase/grant date). OP has long-term capital for the gain post purchase.

Let us say OP sells 364 days after buying ESPP. (>1 year after GRANT date). OP basis in the stock is the purchase date value. OP realizes W2 income for the discount. (15% of purchase/grant date). OP has short-term capital for the gain post purchase.

For a disqualifying distribution, the Short-term vs. Long-term capital gain AFTER purchase is ONLY determined by the length of time the stock is held, ie, after PURCHASE date.

Now:

Let us say OP sells 18months after buying ESPP. (>2 year after GRANT date and > 1 year after PURCHASE date). OP basis in the stock is no longer the purchase date value. The basis is the lesser of the GRANT price or SALE price, and the OP realizes W2 income on the difference between discounted purchase price and basis. Because the OP held the equity for more than on year in order for it to be qualifying, it is a long-term capital gain on anything above the basis.

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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Tue May 22, 2018 3:31 pm

ryman554 wrote:
Tue May 22, 2018 2:38 pm

3. The GAIN of the stock is long-term or short-term if HELD over more than a year, and is above the basis, regardless of qualifying or disqualifying distributions.
In order for it to be a long-term GAIN it must be HELD over more than a year from PURCHASE and also be held for more than 2 years from the GRANT date (which might mean holding for 18 months from purchase, 24 month; or longer; depending the offering period).

Dottie57
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Re: What are downsides of ESPP @ 15% discount ?

Post by Dottie57 » Tue May 22, 2018 3:44 pm

David Jay wrote:
Mon May 21, 2018 10:21 am
Beehave wrote:
Mon May 21, 2018 9:50 am
Is the company long-term stable and growing?

If not, maybe start looking elsewhere for employment. Your long-term security is infinitely more important than a couple of money-making trades a year.

If the company is stable and growing, why not hold onto stock you are buying at a minimum of 15% off? This is a way to accumulate wealth.

If you are really concerned that in a string of purchases spread in 6 month intervals there will be multiple 15% or greater drops exactly on the dates of purchase, maybe the stock market is not the right place for you.

I'd really suggest you think about long-term goals and not fret about daily fluctuations. You will do much better if you act on auto-pilot. If for you this means buying and holding, or accumulating and selling periodically, or selling immediately upon purchase, then just do it. If you worry and try to micro-manage to the last penny you will spend way too much time, experience unnecessary frustration, and probably achieve worse results.

Best wishes - - - my recommendation is to buy and hold if the company is good. It is a path to accumulation of wealth.
I strongly disagree, for several reasons:
1. It is not possible to see the future with enough clarity to determine if your current employer will be a great company in 30 or 40 years. All one has to do is google the "Nifty 50" to see all of the "great companies" that have become mere shadows of their former selves, or disappeared completely. Just one example from the Nifty 50: Kodak
2. There is excess exposure when both your income and your portfolio are dependent on the performance of same company. I would not hold those shares past 1 year. I work for a 100% ESOP company, I always diversify the maximum possible amount at the earliest possible date (with our plan, we are eligible to diversify a portion of our holdings at age 55, 60 and 65). Not because I think there is an issue with the company but because any other course of action is imprudent.
3. Diversification is the one true "free lunch" in investing. Single-company risk can be eliminated by holding broad-based index funds. No other risk can be so completely removed at essentially no cost.

+1 I learned the hard way.

freebeer
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Re: What are downsides of ESPP @ 15% discount ?

Post by freebeer » Tue May 22, 2018 4:28 pm

Farmboyslim83 wrote:
Tue May 22, 2018 1:52 pm
Do you all have a max, that the 15% can be applied to? I do, and it is not very much, which would pretty much negate any value to doing this.

Thanks.
Remember it's typically 15% of LOWER of starting price or ending price during period. So depending on beta of stock average actual discount much more than 15% (stocks go up more often than down). So can be materially worth doing even if cap is not large.

ryman554
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Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Tue May 22, 2018 6:38 pm

DaftInvestor wrote:
Tue May 22, 2018 3:31 pm
ryman554 wrote:
Tue May 22, 2018 2:38 pm

3. The GAIN of the stock is long-term or short-term if HELD over more than a year, and is above the basis, regardless of qualifying or disqualifying distributions.
In order for it to be a long-term GAIN it must be HELD over more than a year from PURCHASE and also be held for more than 2 years from the GRANT date (which might mean holding for 18 months from purchase, 24 month; or longer; depending the offering period).
. You are conflating the qualifying distribution with a long-term capital gains rules. You can absolutely have a long-term capital gain on a disqualifying distribution from an espp plan.

I gave you three sources which tell you that. Can you please cite your source which tells me something different?


Here's a fourth:
http://fairmark.com/execcomp/espp/disqual.htm

libralibra
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Re: What are downsides of ESPP @ 15% discount ?

Post by libralibra » Wed May 23, 2018 2:10 am

ryman554 wrote:
Tue May 22, 2018 8:41 am
DaftInvestor wrote:
Mon May 21, 2018 5:02 pm
David Jay wrote:
Mon May 21, 2018 3:01 pm
Waba wrote:
Mon May 21, 2018 2:35 pm
David Jay wrote:
Mon May 21, 2018 9:14 am
If you are in a high tax bracket (say, 32% or higher), it may be worth looking at extending the rotation period to 1 year in order to sell at long term capital gains (LTCG) rate.
No, not really. The 15% discount (or whatever discount you get) at vesting is always taxed as ordinary income. Only the difference between the market value at vesting and the eventual sales price is taxed as capital gains. If you sell directly, your capital gains (or losses) will be effectively 0 because it's only the price difference over the last day or two. Since the gains are effectively 0, it matters little what rate you pay on it.
Well explained, I withdraw my suggestion...
And if you did wait to sell you would need to wait longer than a year for gains to be long term since the rule is 1 Year from the purchase and TWO years from the offer period start for ESPP gains to be considered LTCG.
You guys might be meaning to say the right thing, but it's coming out unclear.

Let's define three dates:
GRANT date (the start date of the plan period)
PURCHASE date (the end date of the plan period)
SALE date (when you sell the ESPP shares)

1. What DaftInvestor is describing is a "Qualifying Disposition" of ESPP stock. > 2 years from GRANT and 1 year from PURCHASE. In this case, your "W2" income is the lesser of the price of the stock at GRANT or SALE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). This is almost always lower than the 15% discount rate. The rest is a capital gain, and since you held for one year after purchase, is always Long-Term.
2. What Waba is describing is a "Disqualifying disposition" of ESPP stock, which is < 2 years from GRANT or < 1 year from PURCHASE. In this case your "W2" income is the price of the stock at PURCHASE date MINUS how much you had to pay to exercise the ESPP (85% of GRANT or PURCHASE date). In other words at least 15%, no matter what. The rest is capital gain, which can be short term or long term depending on how long you held the stock after PURCHASE.

Folks here, for various reasons, are telling you to forget about going after the qualifying disposition and just sell at first opportunity. It's the lowest risk, highest reward combination out there. Who wouldn't turn down an annualized >60% ROI, risk free? (15% gain for 3 months of holding?)
Hmm, it looks like each answer in this chain is off by at least a little, but I think that ryman554 is the closest. Correcting the Qualifying Disposition case:

Compensation income is the lesser of
- 15% of the Grant date price
- Sales price minus Purchase price (but not less than 0)

It looks like in the 3 links you posted, thebalance.com got it wrong, but the other two are correct.

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Re: What are downsides of ESPP @ 15% discount ?

Post by DaftInvestor » Wed May 23, 2018 5:49 am

ryman554 wrote:
Tue May 22, 2018 6:38 pm
DaftInvestor wrote:
Tue May 22, 2018 3:31 pm
ryman554 wrote:
Tue May 22, 2018 2:38 pm

3. The GAIN of the stock is long-term or short-term if HELD over more than a year, and is above the basis, regardless of qualifying or disqualifying distributions.
In order for it to be a long-term GAIN it must be HELD over more than a year from PURCHASE and also be held for more than 2 years from the GRANT date (which might mean holding for 18 months from purchase, 24 month; or longer; depending the offering period).
. You are conflating the qualifying distribution with a long-term capital gains rules. You can absolutely have a long-term capital gain on a disqualifying distribution from an espp plan.

I gave you three sources which tell you that. Can you please cite your source which tells me something different?


Here's a fourth:
http://fairmark.com/execcomp/espp/disqual.htm
No conflation - I've been talking about when capital gains can be considered long term for ESPP from the start - simply google "Long term capital gains ESPP" to see lots of statements from many sources.
If my offering period is 3 months with the Grant date set at the beginning of the offering period - I must wait 21 months from purchase before I sell my shares for them to be considered long term to meet the 2 year from grant rule. Many, including you in statements above, miss this rule.
One example source:
https://blog.wealthfront.com/good-espp-no-brainer
Scroll down to "how are ESPPs taxed" and notice the AND I keep trying to point out to you.

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Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Wed May 23, 2018 9:04 am

DaftInvestor wrote:
Wed May 23, 2018 5:49 am
ryman554 wrote:
Tue May 22, 2018 6:38 pm
DaftInvestor wrote:
Tue May 22, 2018 3:31 pm
ryman554 wrote:
Tue May 22, 2018 2:38 pm

3. The GAIN of the stock is long-term or short-term if HELD over more than a year, and is above the basis, regardless of qualifying or disqualifying distributions.
In order for it to be a long-term GAIN it must be HELD over more than a year from PURCHASE and also be held for more than 2 years from the GRANT date (which might mean holding for 18 months from purchase, 24 month; or longer; depending the offering period).
. You are conflating the qualifying distribution with a long-term capital gains rules. You can absolutely have a long-term capital gain on a disqualifying distribution from an espp plan.

I gave you three sources which tell you that. Can you please cite your source which tells me something different?


Here's a fourth:
http://fairmark.com/execcomp/espp/disqual.htm
No conflation - I've been talking about when capital gains can be considered long term for ESPP from the start - simply google "Long term capital gains ESPP" to see lots of statements from many sources.
If my offering period is 3 months with the Grant date set at the beginning of the offering period - I must wait 21 months from purchase before I sell my shares for them to be considered long term to meet the 2 year from grant rule. Many, including you in statements above, miss this rule.
One example source:
https://blog.wealthfront.com/good-espp-no-brainer
Scroll down to "how are ESPPs taxed" and notice the AND I keep trying to point out to you.
What you are citing doesn't say what you think it says. I see one place where it mentions capital gains:
The tax treatment for ESPPs is unique. Unlike a 401(k), your contributions to the ESPP are taxed at ordinary income rates. If you hold your shares for more than a year after the purchase date AND more than two years after the beginning of the offering period then any profit above the gain from the discount will be taxed at capital gains tax rates.
Lets take them in order.
"Unlike a 401(k), your contributions to the ESPP are taxed at ordinary income rates.": yes, this is true. IRS frowns on double taxation, so you are not taxed on return of principal. Your basis in the ESPP is at least what you paid to buy it via paycheck withholding.
"If you hold your shares for more than a year after the purchase date AND more than two years after the beginning of the offering period then any profit above the gain from the discount will be taxed at capital gains tax rates. ": If this statement implies that if I sell before 2year + 1year, it's all wage income? that's patently wrong, and this comes from experience. If I take the statement literally, then the statement is factually correct, even if the converse is not. I get capital gains treatment on my profit/loss. But that's always true.

In fact, if you follow the link in the source you just cited to entitled "Tax Treatment for ESPPs are Unique" https://turbotax.intuit.com/tax-tools/t ... 12047.html, you will find a direct contradiction to what you inferred from the blog:
Disqualifying disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income. The bargain element is the difference between the exercise price and the market price on the exercise date. Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.
Again, you could sell stock 1 year + 1 day from the purchase date and it will be long term capital gain -- and this is important -- over the basis (contribution + bargain element). Doesn't matter if you have a qualifying or disqualifying distribution.

Your basis (via the bargain element) is treated differently for a Qualifying disposition. And also note that the qualifying dispositions imply long-term capital gains treatment (due to one year holding rule), but just because A implies B does not mean you cannot have B without A. This is what you are saying, and you are incorrect on this point.

Further quoting
Qualifying disposition:

You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the “bargain element”) is considered compensation income (taxed at regular rates) on your Form 1040. Any additional profit is considered long-term capital gain (which is be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses.
When you satisfy the 2 year + 1 year rule, the rules change on how the bargain element is taxed. Sometimes it's more, sometimes it's less. Usually you get more long-term capital gains, but not always. But you are always assessed some amount of wage (W2) income, so it is never the case that you get full long-term capital gains treatment.

This is the first time I have ever heard anybody claim you need to have a qualifying distribution to qualify for (long-term) capital gains treatment. Even TurboTax disagrees with this position. As do two of the companies who I have worked for in their various ESPP taxation scenarios. As does the IRS, when accepting my LTCG on a Disqualifying distribution from an ESPP plan in 2011 back when I didn't know any better not to hold company stock.

If you are saying that you get LTCG when you have a "QD", then of course you are right. It's true because of the 1 year holding rule, not due to the 2 year rule.
If you are saying you NEED to have a "QD" to get a LTCG, well, even your sources sources disagree.

Note, when I do a "Long term capital gains ESPP" search a lot of the sources give examples, but they are always only two
1. Sell < 1 year of holding
2. Sell > 1 year of holding + 2 years form grant.
seems like they are missing #3
3. Sell > 1 year of holding and < 2 years from grant.
All of my sources cite #3, and you will find the LTCG treatment there.

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Re: What are downsides of ESPP @ 15% discount ?

Post by Farmboyslim83 » Wed May 23, 2018 9:09 am

freebeer wrote:
Tue May 22, 2018 4:28 pm
Farmboyslim83 wrote:
Tue May 22, 2018 1:52 pm
Do you all have a max, that the 15% can be applied to? I do, and it is not very much, which would pretty much negate any value to doing this.

Thanks.
Remember it's typically 15% of LOWER of starting price or ending price during period. So depending on beta of stock average actual discount much more than 15% (stocks go up more often than down). So can be materially worth doing even if cap is not large.
Thanks Freebeer,
I can only get the 15% discount on a yearly max of, let's say, $2,000. that's it.

ryman554
Posts: 1063
Joined: Sun Jan 12, 2014 9:44 pm

Re: What are downsides of ESPP @ 15% discount ?

Post by ryman554 » Wed May 23, 2018 9:12 am

libralibra wrote:
Wed May 23, 2018 2:10 am

Hmm, it looks like each answer in this chain is off by at least a little, but I think that ryman554 is the closest. Correcting the Qualifying Disposition case:

Compensation income is the lesser of
- 15% of the Grant date price
- Sales price minus Purchase price (but not less than 0)

It looks like in the 3 links you posted, thebalance.com got it wrong, but the other two are correct.
Yeah, I realized later yesterday that I got the QD income wrong. That's because it never made sense to me in the first place. And so, I shall never again try to explain what the compensation income is -- mainly because I'll never be in that position again!

Thanks for the correction.

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