Strategy for employee stock purchase plan (ESPP)

[grogu]

My wife’s employer will soon be rolling out an employee stock purchase plan. The details have not been communicated yet, but this is what we know/believe:
• She will have a $10k-15k annual limit in purchases.
• 15% discount on the purchase price.
• Payroll deductions are made throughout each quarter, and the stock purchase is made on the last trading day of the quarter.
• Shares can be sold at any time after purchase.
• No mention of any lookback provision (at least not yet), so I assume that is inapplicable.

About us:
• We max out both of our IRAs, 401ks, etc. Have very healthy, balances in these and other accounts.
• Aggressive investors (~90% equities), hoping to retire early in 5-10 years.
• Her company is very large and solid (but I am aware of Enron, Bear Stearns, and the like). We don't own any other company stock, except as part of index funds.
• This would be a very small portion of our portfolio. I’m not concerned about putting investment/employment eggs in the same basket. If the company stock crashes, it obviously would be unfortunate, but wouldn’t impact our financial situation, at least not for a few years.
• Willing to take the risk that that stock crashes in the seconds/minutes/day (option 1 below) or year+ (options 2, 3 below) between the time she's eligible to sell and the time when the sale actually is completed.
• Likely to be in the 32% income tax bracket and 15% long-term capital gains bracket.

Our options, as I see them, with the ESPP:

• (1) Immediately cash out each quarter: Make a near-guaranteed 15% profit (or 17.5% as I vaguely recall), minus 33% ordinary income taxes.
  (2) Let it ride with the company stock for a while: Make whatever the stock makes (or loses), minus 15% LTCG.
  (3) Hedge, using some combination of 1 and 2. Maybe start an annual practice of selling whatever stock we own that has been held for more than 1 year?

What to do?
We are leaning towards option 3, but definitely think we'll be keeping at least some shares for at least a year. It seems to me that not only does keeping the stock have the higher potential return (obviously with greater potential risk), but we’d also be paying half as much taxes (15% vs 32%).

I have read several similar threads about this topic but would welcome others’ thoughts here.

Thanks.

[KRP]

My wife’s employer will soon be rolling out an employee stock purchase plan. The details have not been communicated yet, but this is what we know/believe:
• She will have a $10k-15k annual limit in purchases.
• 15% discount on the purchase price.
• Payroll deductions are made throughout each quarter, and the stock purchase is made on the last trading day of the quarter.
• Shares can be sold at any time after purchase.
• No mention of any lookback provision (at least not yet), so I assume that is inapplicable.

About us:
• We max out both of our IRAs, 401ks, etc. Have very healthy, balances in these and other accounts.
• Aggressive investors (~90% equities), hoping to retire early in 5-10 years.
• Her company is very large and solid (but I am aware of Enron, Bear Stearns, and the like). We don't own any other company stock, except as part of index funds.
• This would be a very small portion of our portfolio. I’m not concerned about putting investment/employment eggs in the same basket. If the company stock crashes, it obviously would be unfortunate, but wouldn’t impact our financial situation, at least not for a few years.
• Willing to take the risk that that stock crashes in the seconds/minutes/day (option 1 below) or year+ (options 2, 3 below) between the time she's eligible to sell and the time when the sale actually is completed.
• Likely to be in the 32% income tax bracket and 15% long-term capital gains bracket.

Our options, as I see them, with the ESPP:

• (1) Immediately cash out each quarter: Make a near-guaranteed 15% profit (or 17.5% as I vaguely recall), minus 33% ordinary income taxes.
  (2) Let it ride with the company stock for a while: Make whatever the stock makes (or loses), minus 15% LTCG.
  (3) Hedge, using some combination of 1 and 2. Maybe start an annual practice of selling whatever stock we own that has been held for more than 1 year?

What to do?
We are leaning towards option 3, but definitely think we'll be keeping at least some shares for at least a year. It seems to me that not only does keeping the stock have the higher potential return (obviously with greater potential risk), but we’d also be paying half as much taxes (15% vs 32%).

I have read several similar threads about this topic but would welcome others’ thoughts here.

Thanks.

The ordinary income event occurs whether you same-day-sell or hold, so it can be thought of as two events. Would you buy $10K-$15K or your employer's stock each year with cash? Do you want your income/wages risk and your asset risk tied to one company, let alone the same company?

At a minimum, it always makes sense to fully participate and same-day-sell if you can cash flow the first six month period...

[grogu]

The ordinary income event occurs whether you same-day-sell or hold

Perhaps I was operating under a major misconception as to how ESPPs operate. I thought the ordinary income tax would only be incurred on the 15% discount if the stock was sold immediately, and if we didn’t touch the stock for more than a year, all we would owe is long-term capital gains on the total gain (the initial 15% + whatever else it may have gained during that time) when we sell.

But if ordinary income tax will be incurred at the time of the discounted purchase regardless, that changes the equation quite a bit--and takes some (all?) of the appeal off of holding the stock. In fact, if I understand things correctly, once the initial discounted purchase is made, there is essentially no tax or account advantage between (a) owning company stock in the ESPP and (b) taking the money and buying a total market index fund in an after-tax account?

[GreendaleCC]

There’s more to it than what you describe here. Fairmark is my go-to reference for ESPP rules and tax implications:

https://fairmark.com/compensation-stock ... ase-plans/

[KRP]

The ordinary income event occurs whether you same-day-sell or hold

Perhaps I was operating under a major misconception as to how ESPPs operate. I thought the ordinary income tax would only be incurred on the 15% discount if the stock was sold immediately, and if we didn’t touch the stock for more than a year, all we would owe is long-term capital gains on the total gain (the initial 15% + whatever else it may have gained during that time) when we sell.

But if ordinary income tax will be incurred at the time of the discounted purchase regardless, that changes the equation quite a bit--and takes some (all?) of the appeal off of holding the stock. In fact, if I understand things correctly, once the initial discounted purchase is made, there is essentially no tax or account advantage between (a) owning company stock in the ESPP and (b) taking the money and buying a total market index fund in an after-tax account?

The fairmark site posted above is a good start. I think I may have oversimplified above.
I have done both, starting initially for many years with holding until qualified. The holding period (stocks don't always rise) plus the more complicated tax returns spanning the holding period plus the smallish total and therefore smallish net proceeds plus the occasional recession downswing while holding...what looked like a tax advantage (waiting for a qualified distribution) turned out over several years to simply not justify the extra work, so I switched to same-day-sell and diversify...which is W2 plus/minus a small capital gain/loss on one tax return and then it is done. I switched many years ago, so I may be misremembering, but I seem to recall the W2 ordinary income was close enough to the same either way, and sometimes offset by what happened in two years of holding, and employer concentration was probably worth avoiding...so I give it a "meh". It probably won't matter either way, at that amount. Participation is definitely worthwhile, whether holding or not.

[Alto Astral]

I sell mine the moment it becomes vested. Here's a short article on why. The tl;dr version is you will pay the 15% at your income bracket. Holding on to ESPP any longer is equivalent to buying the $10-15k in company stock and hoping for a good ride.

[AnEngineer]

Without a look back provision, there's no reason not to sell immediately, unless you really need to avoid the discount on that year's W2. Without a look back that triggered, no part of the 15% discount will ever become LTCG.

[MrBeaver]

The ordinary income event occurs whether you same-day-sell or hold

Perhaps I was operating under a major misconception as to how ESPPs operate. I thought the ordinary income tax would only be incurred on the 15% discount if the stock was sold immediately, and if we didn’t touch the stock for more than a year, all we would owe is long-term capital gains on the total gain (the initial 15% + whatever else it may have gained during that time) when we sell.

But if ordinary income tax will be incurred at the time of the discounted purchase regardless, that changes the equation quite a bit--and takes some (all?) of the appeal off of holding the stock. In fact, if I understand things correctly, once the initial discounted purchase is made, there is essentially no tax or account advantage between (a) owning company stock in the ESPP and (b) taking the money and buying a total market index fund in an after-tax account?

It’s complicated.

There are essentially three times you can sell that change taxation behavior: unqualified short term, unqualified long term, and qualified long term.

Once qualified, regular income tax rates shift from the discount at purchase date (15% of purchase price) to the discount at the grant date of the offering (15% of the price when you elect to participate for that period, in your case, roughly 3 months earlier).

This sets up an interesting situation where selling as a disqualified distribution, long term, is better for tax treatment than a qualified long term distribution in the case that the stock price went down between grant date and purchase date, and went up prior to selling. Likewise when it goes up between grant and purchase date but down between purchase date and sell date, it’s better to sell as disqualifying as more of the loss portion applies to regular income taxation rate than a capital gains loss.

Here is a resource I have found helpful:
https://www.seabornfinancial.co/single- ... with-taxes


Ultimately though, pick something simple and don’t let the tax tail wag the dog. Remember that the 18% tax savings only applies to the gain between grant date and purchase date. Therefore, that benefit will be surpassed by lost performance if during the 1.5-1.75 year period between purchase and qualified sale date, the stock underperforms the market by 18% of the stock price difference between grant date and purchase date. So if the stock doubles in that period due to an enduring reason or fast market recovery, it may well make sense to hold it. But it’s more likely that it only appreciates by maybe 5% during that time, which means holding the stock only has to underperform the market by 0.9% (18% of 5%) over the next 1.5-1.75 years for it to have been a better decision to sell immediately. The good news is you will know the difference between grant price and sale price for every lot, so you can make the decision for each lot as it vests.

The other factor is emotional. If the company is small and high growth (sounds like this is not the case), it can make emotional sense to hold some just to not feel horrible if the stock wildly outperforms the market. Of course that is taking on additional risk though.

[AnEngineer]

Once qualified, regular income tax rates shift from the discount at purchase date (15% of purchase price) to the discount at the grant date of the offering (15% of the price when you elect to participate for that period, in your case, roughly 3 months earlier).

Isn't this only for a qualified plan with a lookback provision when the FMV at the grant date was lower than the purchase date? According to the OP, none of that applies.

[MrBeaver]

Once qualified, regular income tax rates shift from the discount at purchase date (15% of purchase price) to the discount at the grant date of the offering (15% of the price when you elect to participate for that period, in your case, roughly 3 months earlier).

Isn't this only for a qualified plan with a lookback provision when the FMV at the grant date was lower than the purchase date? According to the OP, none of that applies.

Not in my understanding. It does have to be a qualified plan, but the presence of a lookback provision doesn’t change the tax implications, just the determination of the purchase price.

[inbox788]

• (1) Immediately cash out each quarter: Make a near-guaranteed 15% profit (or 17.5% as I vaguely recall), minus 33% ordinary income taxes.
  (2) Let it ride with the company stock for a while: Make whatever the stock makes (or loses), minus 15% LTCG.
  (3) Hedge, using some combination of 1 and 2. Maybe start an annual practice of selling whatever stock we own that has been held for more than 1 year?

What to do?
We are leaning towards option 3, but definitely think we'll be keeping at least some shares for at least a year. It seems to me that not only does keeping the stock have the higher potential return (obviously with greater potential risk), but we’d also be paying half as much taxes (15% vs 32%).

No. Option 3 is the worst! The optimal points will likely be keep all or sell all, not hybrid. Figure out the tax implications for your plan and hold it the minimal time required. Each year should be treated independently. Figure out what benefit holding it past each milestone provides. After the nearly guaranteed 15%, there isn't much more benefit that's worth the additional single stock risk. If there is any consequence of turning STCG to LTCG by holding a short time, the gains have to be very high to make a substantial difference, even if it's up 20-30% (if it's up 100 or 200% or more, you might think different).

[AnEngineer]

No. Option 3 is the worst! The optimal points will likely be keep all or sell all, not hybrid. ...

Responding to this general idea: you only know what is best is hindsight. Combining two things can reduce risk while getting a blend of the benefits. Your argument is the same as arguing that holding stocks and bonds is the worst, because one of them is optimal.

[inbox788]

No. Option 3 is the worst! The optimal points will likely be keep all or sell all, not hybrid. ...

Responding to this general idea: you only know what is best is hindsight. Combining two things can reduce risk while getting a blend of the benefits. Your argument is the same as arguing that holding stocks and bonds is the worst, because one of them is optimal.

No. I'm not talking about unknown performance. I'm taking about know tax and plan benefits, and trying to maximize benefits.

[AnEngineer]

No. Option 3 is the worst! The optimal points will likely be keep all or sell all, not hybrid. ...

Responding to this general idea: you only know what is best is hindsight. Combining two things can reduce risk while getting a blend of the benefits. Your argument is the same as arguing that holding stocks and bonds is the worst, because one of them is optimal.

No. I'm not talking about unknown performance. I'm taking about know tax and plan benefits, and trying to maximize benefits.

For the known parts, I don't see how mixing can be worse than either. Taking out all unknowns, one is better than the other (unless the same), so a mix must be in between.

[inbox788]

For the known parts, I don't see how mixing can be worse than either. Taking out all unknowns, one is better than the other (unless the same), so a mix must be in between.

That's assuming a concave or linear curve. I propose the curve is concave to the origin. I think each lot purchased is an independent decision that doesn't benefit from mixing.

The issue is holding single stock vs diversified fund, and assuming all would fully diversify at a zero tax cost. Some would diversify at any cost, while others have a threshold where they would be indifferent. Many would pay 1-2% net taxes to diversify. Some might pay 5-10% or more. This is an individual choice. If we use the tax rate difference 15 vs 32 and 25% 1 year gain, we get 4.25%. Over time, we expect the gain to grow, so the tax cost goes up beyond threshold, hopefully never to return below again (but like TLH, may present an opportunity).

I think the best strategy is to be willing to pay a modest diversification tax and not wind up locked into a single stock tax trap.

https://www.seia.com/avoiding-the-tax-tail-trap/

In choosing a number, consider this. Would you hold the single stock for a long time for 4.25% or 15% benefit? Or what percent extra would entice you to take this single stock risk long-term?

So it's possible you wind up with a mix, but not because it's some sort of optimum or equilibrium, but because of the particulars of the path that was taken.

[AnEngineer]

For the known parts, I don't see how mixing can be worse than either. Taking out all unknowns, one is better than the other (unless the same), so a mix must be in between.

That's assuming a concave or linear curve. I propose the curve is concave to the origin.

I don't see why it would be. (I don't even see how it could not be linear.)

[twh]

Option 1

Very likely some lookback will be included. At least the lowest price of the beginning or end of the period. Many plans even take the lowest price of the last couple/few periods.

[DoubleComma]

Income tax is charged on the discount you received; you mention 15% of the share price, so you will paying ordinary income tax on the dollar value of the 15% discount.

When you sell the shares you will pay taxes on any capital gain, either long term or short term depending on how long you hold it.

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

[AnEngineer]

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

Do you have some holding requirement? Why turn away the money? The risk of holding for a day is extremely low.

[KRP]

OP quote includes:
• Payroll deductions are made throughout each quarter, and the stock purchase is made on the last trading day of the quarter.
• Shares can be sold at any time after purchase.

The 15% isn’t enough incentive for me to aggregate more into my company.

That 15% return is quarterly, according to the OP. (More typical seems to be 6 month purchase periods...)
And one doesn't need to loan the company the entire quarter's money for the entire quarter....it's accumulated a bit at a time, per paycheck deduction, but one gets a 15% discount on the total at the end of the period.

In short, the return (with a same-day-sale) as an APR is quite high....participation is generally a good idea (unless one thinks the company will declare bankruptcy and disappear with the payroll deductions)

[single2019]

• (1) Immediately cash out each quarter: Make a near-guaranteed 15% profit (or 17.5% as I vaguely recall), minus 33% ordinary income taxes.
  (2) Let it ride with the company stock for a while: Make whatever the stock makes (or loses), minus 15% LTCG.
  (3) Hedge, using some combination of 1 and 2. Maybe start an annual practice of selling whatever stock we own that has been held for more than 1 year?

What to do?
We are leaning towards option 3, but definitely think we'll be keeping at least some shares for at least a year. It seems to me that not only does keeping the stock have the higher potential return (obviously with greater potential risk), but we’d also be paying half as much taxes (15% vs 32%).

No. Option 3 is the worst! The optimal points will likely be keep all or sell all, not hybrid. Figure out the tax implications for your plan and hold it the minimal time required. Each year should be treated independently. Figure out what benefit holding it past each milestone provides. After the nearly guaranteed 15%, there isn't much more benefit that's worth the additional single stock risk. If there is any consequence of turning STCG to LTCG by holding a short time, the gains have to be very high to make a substantial difference, even if it's up 20-30% (if it's up 100 or 200% or more, you might think different).

Option 2 is the worst. A lot of your finances are already tied to your employer. Why add to it.

[DoubleComma]

Error

[DoubleComma]

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

Do you have some holding requirement? Why turn away the money? The risk of holding for a day is extremely low.

No holding limit. We have a $25k annual max. That means I can purchase $6250 a quarter, 15% discount is $937.50, my marginal tax rate is 41.3% (combined State & National) so the approx gain to me is $550 a quarter. I’m not willing to set it up, manage it, add complication to my tax return for less than 0.5% increase in income.

It might be worth it you, but it’s not to me.

I also don’t chase bank account sign up bonus or search out the maximum credit card rewards strategy either.

[twh]

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

Do you have some holding requirement? Why turn away the money? The risk of holding for a day is extremely low.

No holding limit. We have a $25k annual max. That means I can purchase $6250 a quarter, 15% discount is $937.50, my marginal tax rate is 41.3% (combined State & National) so the approx gain to me is $550 a quarter. I’m not willing to set it up, manage it, add complication to my tax return for less than 0.5% increase in income.

It might be worth it you, but it’s not to me.

I also don’t chase bank account sign up bonus or search out the maximum credit card rewards strategy either.

It's free money you are leaving on the table for little effort. Join the program and sell it the next day it gets deposited. If you sell as soon as you get it, you are not increasing your exposure.

[inbox788]

Option 2 is the worst. A lot of your finances are already tied to your employer. Why add to it.

Because the sweetener is worth it. If the 15% discount is worth it, it's worth looking at the tax benefit/risk. "Madam, we’ve already established that. Now we are haggling about the price."

Elon and other TSLA owners aren't eager to sell stock bought at 600 or less, now that the gain is over 100% YTD, especially if there is a 37% tax due now vs 15% later. The first order is to establish that such a benefit exists and then each investor has to evaluate his risk/reward tolerance and timeframe. Generally, ESPP doesn't have great incentives, especially beyond the initial benefits (15% discount), but in the case of TSLA this year, it would be worth it for me to wait till Jan 22 to get LTCG vs paying STCG on $600 TSLA cost basis ($83 vs $204), but not $1000 TSLA bought last month ($43 vs $23) [assuming TSLA stays flat at 1150 now and later -- unlikely assumption]. Would I hold $700-800 shares for 6-9 months? Probably. Other may find that too risky. But depending on the specific terms, OPs program may never get to this point.

I'm not looking for some optimal 60/40 mix or trying to blend some timeframe. I'm calculating a specific risk/benefit for this particular lot of ESPP and deciding whether the benefit is worth the risk. $11 [43-23] on >$1000 share for many months, NO, but >$100 or around 10% gain over 2 months, YES!

[DoubleComma]

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

Do you have some holding requirement? Why turn away the money? The risk of holding for a day is extremely low.

No holding limit. We have a $25k annual max. That means I can purchase $6250 a quarter, 15% discount is $937.50, my marginal tax rate is 41.3% (combined State & National) so the approx gain to me is $550 a quarter. I’m not willing to set it up, manage it, add complication to my tax return for less than 0.5% increase in income.

It might be worth it you, but it’s not to me.

I also don’t chase bank account sign up bonus or search out the maximum credit card rewards strategy either.

It's free money you are leaving on the table for little effort. Join the program and sell it the next day it gets deposited. If you sell as soon as you get it, you are not increasing your exposure.

Look we all leave money on the table in some ways.

Losing access to the money via payroll deduction as it builds each quarter, waiting for the buy to settle, then the sell to settle before getting my money back and immediately starting over isn’t worth it to me.

I realize this is heresy to some around here but I have enough to not have to worry about things like this and am very content not to participate. Everyone must have an amount where it’s worth it and when it’s not, mine happens to be $200/month in this instance

[AnEngineer]

We have a ESPP, I don’t use it. The 15% isn’t enough incentive for me to aggregate more into my company. I already have RSU grants and my income dependent on company performance so the ESPP isn’t worth it to me.

Do you have some holding requirement? Why turn away the money? The risk of holding for a day is extremely low.

No holding limit. We have a $25k annual max. That means I can purchase $6250 a quarter, 15% discount is $937.50, my marginal tax rate is 41.3% (combined State & National) so the approx gain to me is $550 a quarter. I’m not willing to set it up, manage it, add complication to my tax return for less than 0.5% increase in income.

It might be worth it you, but it’s not to me.

I also don’t chase bank account sign up bonus or search out the maximum credit card rewards strategy either.

It's free money you are leaving on the table for little effort. Join the program and sell it the next day it gets deposited. If you sell as soon as you get it, you are not increasing your exposure.

Look we all leave money on the table in some ways.

Losing access to the money via payroll deduction as it builds each quarter, waiting for the buy to settle, then the sell to settle before getting my money back and immediately starting over isn’t worth it to me.

I realize this is heresy to some around here but I have enough to not have to worry about things like this and am very content not to participate. Everyone must have an amount where it’s worth it and when it’s not, mine happens to be $200/month in this instance

For you, the gain may not be worth it, but I think this is a function of your high income ~400k/year. Marginal benefit of more money is low at that point.

However, your expectation of settlement are not universal. Many brokers afford limited margin cost free to allow trading before settlement. For example, my ESPP purchases have happened at the end of the day, immediately the next morning I can sell and immediately use the proceeds to buy index funds ( ETFs in my case).

[grogu]

Thanks for the varied analysis.

I will report back if I learn of any new information regarding the lookback provision. If my current understanding is correct that there is no lookback, it seems the consensus, even among those who might otherwise be interested in giving this a shot, is that the juice (LTCG treatment) isn’t worth the squeeze (tax/record-keeping complexity, risk of stock going down, etc.). Thus, if I'm right about the lookback, we’ll probably just sell immediately.

But if it turns out there is a lookback provision, that might make holding the stock for 1.5-1.75 years worth the risk, or at least worth thinking about more. So for those of you who have held or would consider holding a portion of your company stock long-term (I understand many of you would never do so), what is your threshold for keeping? In other words, how much would the stock price need change during the lookback period for you to decide to keep it? My wife’s company is a large, established company (not a tech startup, for example) so I think it is unlikely that there would be many huge (>10%) increases in price in a 3-month period.

[DoubleComma]

Thanks for the varied analysis.

I will report back if I learn of any new information regarding the lookback provision. If my current understanding is correct that there is no lookback, it seems the consensus, even among those who might otherwise be interested in giving this a shot, is that the juice (LTCG treatment) isn’t worth the squeeze (tax/record-keeping complexity, risk of stock going down, etc.). Thus, if I'm right about the lookback, we’ll probably just sell immediately.

But if it turns out there is a lookback provision, that might make holding the stock for 1.5-1.75 years worth the risk, or at least worth thinking about more. So for those of you who have held or would consider holding a portion of your company stock long-term (I understand many of you would never do so), what is your threshold for keeping? In other words, how much would the stock price need change during the lookback period for you to decide to keep it? My wife’s company is a large, established company (not a tech startup, for example) so I think it is unlikely that there would be many huge (>10%) increases in price in a 3-month period.

If you participate and plan to hold the shares, I would hold them at least 1 year so that you have a LTCG not short term.

[twh]

Thanks for the varied analysis.

I will report back if I learn of any new information regarding the lookback provision. If my current understanding is correct that there is no lookback, it seems the consensus, even among those who might otherwise be interested in giving this a shot, is that the juice (LTCG treatment) isn’t worth the squeeze (tax/record-keeping complexity, risk of stock going down, etc.). Thus, if I'm right about the lookback, we’ll probably just sell immediately.

But if it turns out there is a lookback provision, that might make holding the stock for 1.5-1.75 years worth the risk, or at least worth thinking about more. So for those of you who have held or would consider holding a portion of your company stock long-term (I understand many of you would never do so), what is your threshold for keeping? In other words, how much would the stock price need change during the lookback period for you to decide to keep it? My wife’s company is a large, established company (not a tech startup, for example) so I think it is unlikely that there would be many huge (>10%) increases in price in a 3-month period.

If you participate and plan to hold the shares, I would hold them at least 1 year so that you have a LTCG not short term.

Presumably, most people that have access to ESPP and also getting stock options and/or RSU (restricted stock units). No need to increase exposure to the stock. Just join the ESPP program and sell it as soon as it shows up in the captive brokerage account -- just enjoy the free money.

[Boglehead1967]

The ordinary income event occurs whether you same-day-sell or hold

Perhaps I was operating under a major misconception as to how ESPPs operate. I thought the ordinary income tax would only be incurred on the 15% discount if the stock was sold immediately, and if we didn’t touch the stock for more than a year, all we would owe is long-term capital gains on the total gain (the initial 15% + whatever else it may have gained during that time) when we sell.

But if ordinary income tax will be incurred at the time of the discounted purchase regardless, that changes the equation quite a bit--and takes some (all?) of the appeal off of holding the stock. In fact, if I understand things correctly, once the initial discounted purchase is made, there is essentially no tax or account advantage between (a) owning company stock in the ESPP and (b) taking the money and buying a total market index fund in an after-tax account?

If you keep the stock purchased at the end of the Q for 12 months you pay capital gains on appreciation of the price at the moment of purchase, which is when shares are deposited into your brokerage account. On the 15% discount you will pay an ordinary income tax. Not sure if I communicated this well.

[AnEngineer]

Thanks for the varied analysis.

I will report back if I learn of any new information regarding the lookback provision. If my current understanding is correct that there is no lookback, it seems the consensus, even among those who might otherwise be interested in giving this a shot, is that the juice (LTCG treatment) isn’t worth the squeeze (tax/record-keeping complexity, risk of stock going down, etc.). Thus, if I'm right about the lookback, we’ll probably just sell immediately.

But if it turns out there is a lookback provision, that might make holding the stock for 1.5-1.75 years worth the risk, or at least worth thinking about more. So for those of you who have held or would consider holding a portion of your company stock long-term (I understand many of you would never do so), what is your threshold for keeping? In other words, how much would the stock price need change during the lookback period for you to decide to keep it? My wife’s company is a large, established company (not a tech startup, for example) so I think it is unlikely that there would be many huge (>10%) increases in price in a 3-month period.

If you participate and plan to hold the shares, I would hold them at least 1 year so that you have a LTCG not short term.

Presumably, most people that have access to ESPP and also getting stock options and/or RSU (restricted stock units). No need to increase exposure to the stock. Just join the ESPP program and sell it as soon as it shows up in the captive brokerage account -- just enjoy the free money.

Are you saying that such a person would be holding RSU shares? I don't see why, there's no special reason to hold RSU shares. As discussed in this thread, there can be tax advantages to holding ESPP shares for a qualifying disposition in the right circumstances.

[Bigt3142]

I used to contribute to my company ESPP. They would match 10% of my purchase of $300 (max) per week. The 10% match would be added to my pay statement weekly and I would pay income tax on it. Once per month they would purchase stocks and they could be immediately sold. I was selling them as soon as they purchased. Recently our stock price went on a significant run and is currently 4X what it was last year. This strategy worked well with stock prices rising. Over the last few months the price has been very volatile and the price seemed to dip significantly every time they purchased. I got hit with the wash rule with every sell. I've since decided to stop purchasing the stocks until the price becomes more predictable, as it had been for the past decade.

I have thought a good option to avoid the wash rule would be to purchase and hold until they hit long term capital gains and then sell the stock monthly once it reaches that point and investing that into an index fund. I'm not willing to do that right now because I think the stock is significantly over priced and there's high risk that it could drop significantly. In 2008 the stock was at an all time high, when the recession hit the price dropped in half and never got close to that price again until this year. I believe there's significant risk of it doing that again soon.

[grogu]

To further clarify, assuming the plan has a lookback provision, I am asking how much of a change in stock price would need to occur during the lookback period for you to hold the stock for an additional 1.5-1.75 years (i.e., for the sale to become qualified), as opposed to selling immediately upon granting.

Let me give a couple of examples to make sure I am understanding things correctly:

Ex 1 (no lookback):

• Stock price on day 1 of the quarter: [doesn’t matter]
• Stock price on last trading day of the quarter: $100
• I buy at $85 (15% discount). $15 is ordinary income no matter what. If I sell immediately, that’s the end of my tax liability.
• But if I hold the stock, and it later increases to $109, I will owe $9 in either STGC/ordinary income (if not qualified) or $9 in LTCG (if qualified).

Ex 2 (lookback offered):

• Stock price on day 1 of the quarter: $90
• Stock price on last trading day of the quarter: $100
• I buy at $76.5 (85% of the lower of $90 or $100). I owe ordinary income tax on $13.5 ($90 - 76.5).
• If I sell immediately, would I also owe capital gains tax on $10 ($100 - 90)? If so, that’s the scenario I’m thinking where it could be advantageous to wait to sell until it becomes LTCG (obviously the stock price can either increase more or decrease in the meantime).

Ex 2A (same as 2, only stock decreases during lookback):

• Stock price on day 1 of the quarter: $100
• Stock price on last trading day of the quarter: $90
• I buy at $76.5 (85% of the lower of $90 or $100). I owe ordinary income tax on $13.5 ($90 - 76.5).
• If I sell immediately, there is no additional capital gains (there is a loss), right? And no tax advantage to hold onto the stock longer?

Assuming all of the above is correct (which it may not be), Example 2 has the potential to generate a significant tax savings by waiting to sell. If so, how much would the stock need to go up for you to let it ride and continue holding the stock?

[twh]

Are you saying that such a person would be holding RSU shares? I don't see why, there's no special reason to hold RSU shares. As discussed in this thread, there can be tax advantages to holding ESPP shares for a qualifying disposition in the right circumstances.

I'm not saying they are sitting on vested RSU. It makes no sense to sit on them once they vest. I'm saying that presumably they have some RSU that aren't vested and that constitutes an exposure already in the company stock and that holding ESPP in order to eke out a LTCG isn't prudent.

[grogu]

Are you saying that such a person would be holding RSU shares? I don't see why, there's no special reason to hold RSU shares. As discussed in this thread, there can be tax advantages to holding ESPP shares for a qualifying disposition in the right circumstances.

I'm not saying they are sitting on vested RSU. It makes no sense to sit on them once they vest. I'm saying that presumably they have some RSU that aren't vested and that constitutes an exposure already in the company stock and that holding ESPP in order to eke out a LTCG isn't prudent.

No other RSU or stock options offered, just the ESPP. No concerns about the minimal additional exposure to the company stock.

[Rose]

Bumping this for a small variant in ESPP question. Our ESPP is similar to OP's.

We just realized we haven't sold some ESPP. Currently sitting on some LT and ST gains. There's a recent run, so a few have over $3k LT gain, some only $1K LT gain.

What's the order of selling? I'm thinking it's all fungible and as long as it doesn't push us to the next tax bracket, we should sell all. No holding requirements.

[AnEngineer]

Bumping this for a small variant in ESPP question. Our ESPP is similar to OP's.

We just realized we haven't sold some ESPP. Currently sitting on some LT and ST gains. There's a recent run, so a few have over $3k LT gain, some only $1K LT gain.

What's the order of selling? I'm thinking it's all fungible and as long as it doesn't push us to the next tax bracket, we should sell all. No holding requirements.

Do you have a lookback provision that triggered? How much benefit? If so, how much time would you have to wait for a qualified disposition?

How long until those ST gains become LT?

[Rose]

No look back provision.

As we're still participating on ESPP (similar deal with OP) will always have a ST 3-month, 6-month and 9-month ones.

[AnEngineer]

No look back provision.

As we're still participating on ESPP (similar deal with OP) will always have a ST 3-month, 6-month and 9-month ones.

Do you have a minimum holding period?

[Rose]

No look back provision.

As we're still participating on ESPP (similar deal with OP) will always have a ST 3-month, 6-month and 9-month ones.

Do you have a minimum holding period?

My ESPP is similar to OP. Shares can be sold at any time after purchase.

[AnEngineer]

As we're still participating on ESPP (similar deal with OP) will always have a ST 3-month, 6-month and 9-month ones.

If there's no holding period and no look back then what you say here is incorrect. At purchase, you receive a discount, but that discount is not a capital gain, it's wage income that's not realized until you sell. This is important because it never becomes long term. You have no reason not to sell every share as you get it unless you want to hold your employer's stock.

Also note that for LTCG the only tax brackets that matter are the 0/15/20% bracketsfor LTCG. Selling LT doesn't affect tax bracket on regular income. It might trigger other income based threshold and phaseouts for tax credits and whatnot.

You didn't clarify how close current gains are to becoming LT, so I'll just say if I didn't have to wait long I might hold for LTCG. The difference in tax rates means the stock could still go down somewhat and you'd still come out ahead. The higher the % capital gain the bigger the effect. But if it's a large portion of your holdings you can also just sell.

[Rose]

As we're still participating on ESPP (similar deal with OP) will always have a ST 3-month, 6-month and 9-month ones.

If there's no holding period and no look back then what you say here is incorrect. At purchase, you receive a discount, but that discount is not a capital gain, it's wage income that's not realized until you sell.

Understood. It did show as such in my W2.

You didn't clarify how close current gains are to becoming LT, so I'll just say if I didn't have to wait long I might hold for LTCG. The difference in tax rates means the stock could still go down somewhat and you'd still come out ahead. The higher the % capital gain the bigger the effect. But if it's a large portion of your holdings you can also just sell.

Specifically there are stock that are 3-month, 6-month, 9-month, 12-month, 15-month, 18-month old, 21-month old. All of them show nice gain due to recent run-up in stock price. I was not and not planning to hold company stock. I'm thinking to sell up to my tax bracket and manage not to trigger additional taxes (NIIT, we already passed AMT threshold). The question is which lot should I sell first, does it matter?

[AnEngineer]

It sounds like the only real difference is LT vs ST? If not selling all, I'd prioritize long term and then the most recent ST so some ST can turn into LT. If gains are uneven, I'd probably sell those with the lowest percent gain first to sell the most shares for the same income, thus minimizing exposure to the stock.

[Rose]

It sounds like the only real difference is LT vs ST? If not selling all, I'd prioritize long term and then the most recent ST so some ST can turn into LT. If gains are uneven, I'd probably sell those with the lowest percent gain first to sell the most shares for the same income, thus minimizing exposure to the stock.

Thank you for the explanations, I knew about ST vs LT but not about the gains.
And sell up to tax bracket (including NIIT etc in calculation), right?

[AnEngineer]

And sell up to tax bracket (including NIIT etc in calculation), right?

Depends on the details. Given the concentration risk, I wouldn't worry too much about NIIT, it's not that high. I assume you're in the 15% LTCG bracket, which is very wide, so I expect everything fits there. If your question is focused on ST, it depends on what the tax brackets are. E.g. I wouldn't worry about 22% vs 24% because they're so close.

OTOH, it's already December, so you wouldn't have to wait long to move some income into next year.