Capital Gains and Losses

# What is the math to use behind ESPP plans tax at time of…

What is the math to...
What is the math to use behind ESPP plans tax at time of sale. What's the difference between qualified and non-qualified status. Thanks
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3/16/2018
taxmanrog, CPA, MST, MA
Category: Capital Gains and Losses
Satisfied Customers: 1,026
Experience: Licensed CPA with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Welcome to Just Answer! Thank you for giving me the opportunity to assist you! I will do my best to help!

An employee stock purchase plan allows an employee to periodically purchase company stock at a discount through payroll deductions at certain periods during the year. This is usually done semi-annually. The employee usually can buy the stock at 85% of what the market closes at on the designated day of purchase.

These are considered stock options, and as such have a required holding period to gain favorable tax treatment.

The main requirement is that the employee hold the stock for 18 months after the purchase date. If the employee fails to hold the stock for that period, the sale is called a "disqualifying disposition" and the discount that the employee received at purchase goes into the employee's Form W-2 earnings as taxable income. For example, if the employee purchases stock on a date when the closing price is \$100, the employee will pay \$85. If the employee fails to hold the stock for 18 months, the \$15 discount is added to the employee's wages.

The employee's basis in the disqualifying shares is the \$85 originally paid, plus the \$15 added to the W-2. If he sold the stock at \$105, he will have a \$5 capital gain. It is short-term or long-term depending on how long from the purchase date the employee held the stock.

If the employee holds the stock for 18 months, his basis remains \$85. If he later sells for \$105, he has a \$20 long term capital gain.

Thanks! Have a great week!

Roger

Customer reply replied 1 month ago
Thanks! Would the employer ever count it as ordinary income before the sale?Also, i would like to ask you another question on RSUs. Shoudl i open a new question and can you pick it up?
No, because you are paying for the stock with after tax deductions. The only time the employer does anything with income is if you sell it before 18 months, in which case it is a disqualifying disposition and the discount that you received on purchase is recorded as ordinary income in your W-2. That's the only time.
You can ask him this thread, but I am about to go to bed. I have to be up at 6 for a meeting all day tomorrow.
Customer reply replied 1 month ago
Does the holding period begin with the start of the offering period when the \$ contributions start, or when the shares are actually purchased?
Customer reply replied 1 month ago
6am! goodnight and have a great day. by other question was around RSU and what is the tax accounting for that. Does the company count it as ordinary income as the vest? Is there a special holding period for RSU similar to ESPP? We always seem to underpay taxes and we think it's because of the RSU vesting.
The holding period starts with the shares are actually purchased.
Customer reply replied 1 month ago
To clarify on this, my ESPP grant date establishes a price that is good for 2 years. So my 2015 price applied through 2017.1. Let's say my grant price was \$43 and my discount is 15%. So my purchase price is \$36.7. However the market trading price at purchase is double that at \$72.what are the tax consequences of selling after 2 years? My etrade document says i have to hold 2 years, but you are saying i only have to hold 18 months - any idea on why the discrepancy?2. My other question was around RSU and what is the tax accounting for that. Does the company count it as ordinary income as the vest? Is there a special holding period for RSU similar to ESPP? We always seem to underpay taxes and we think it's because of the RSU vesting.
For question 1, you buy it at the trading price at the time of purchase, less 15% if it is an espp. So you would never have a situation where the trading price and your Grant price are so far apart. If it was a stock option, and not an espp then you could have the situation you mentioned.Also, the holding period is determined by the plan. Most holding periods require 18 months to hold. If your plan requires two years, then any sale prior to 2 years causes the discount to be added to your wages as ordinary income. This has the effect of turning a long-term capital gain for the discount into ordinary income and causes higher tax.For restricted stock, the fair market value at the time of vesting is added to your W-2 as ordinary income. There is no holding. Required for RSUs. In fact, I see many people sell them on the same day as the restrictions lapse and the stock vests. It is just considered a short-term capital gain.The reason why people often have two little withheld is because the IRS rules require 25% withholding on supplemental wages, which is what this is considered, and the taxpayer may actually be in a higher tax bracket. So there is an under withholding.
taxmanrog, CPA, MST, MA
Category: Capital Gains and Losses
Satisfied Customers: 1,026
Experience: Licensed CPA with 31 years' experience. Teach Accounting and Tax courses at Masters level.
Verified
taxmanrog, CPA, MST, MA
Category: Capital Gains and Losses
Satisfied Customers: 1,026
1,026 Satisfied Customers
Experience: Licensed CPA with 31 years' experience. Teach Accounting and Tax courses at Masters level.

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