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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29569
Experience:  Taxes, Immigration, Labor Relations
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What are the long-term vs. short-term considerations when

Customer Question

What are the long-term vs. short-term considerations when selling stock from an employee stock purchase plan (ESOP)?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
ESOPs are qualified retirement plans designed to invest primarily in employer securities.Beneficiaries of ESOP plans are taxed in the year that amounts are distributed or if shares are distributed -the taxable amount is usually based on shares fair market value.In additional - for lump-sum distributions, the amount of distribution is attributable to contributions by the employer.
Expert:  Lev replied 1 year ago.
But for periodic distributions, the amount won't include net unrealized appreciation that are attributable to employee contributions to the ESOP.Here's an illustration example: receive an ESOP distribution of 10 shares of Class B stock in your employer's corporation. When you sell the stock and calculate your gain, you'll need to know your basis or cost for the stock. Each share has an average cost of $200. Your contributions totaled $120, and your employer contributed $80 (taxed as ordinary income in the year of distribution). The value of each share is now $300.To figure out the gain on a share of stock, subtract your basis or cost from the value of the share. Your basis is the sum of your and your employer's contributions, and the net unrealized appreciation attributable to your employer's contributions. The net unrealized appreciation on the stock is $100 ($300 current value minus $200). Your employer contributed 40% of the cost of the stock, so 40% or $40 of the net unrealized appreciation counts as part of your basis. This amount is taxable as ordinary income for the year of the distribution. Your basis is $240 - your contribution of $120, $80 from your employer, and $40 of net unrealized appreciation attributable to your employer's contribution.