Will I Have To Pay Tax On My Qualified ESPP?
An Employee Stock Purchase Plan (ESPP) is a program that allows employees to purchase shares of their employer's stock at a discounted price. This can be an attractive benefit for employees, as it allows them to invest in their employer's stock at a lower cost than the market price. However, the tax implications of participating in an ESPP can be complex and require careful planning.
When an individual sells shares of stock acquired through an ESPP, the tax treatment of the sale will depend on whether it is a qualifying disposition or a disqualifying disposition. In a qualifying disposition, the sale occurs after the required holding period, which is generally two years from the date of the offering and one year from the date of purchase. In this case, the gain on the sale is taxed at the lower long-term capital gains rate. However, in a disqualifying disposition, the sale occurs before the holding period is met, and the gain is taxed as ordinary income, subject to payroll taxes.
The "ESPP Tax Consequences" flowchart helps individuals navigate these tax implications by providing a visual representation of the various tax calculations that come into play when selling employer stock acquired through their ESPP. By following the flowchart, individuals can understand whether a sale is a qualifying disposition or disqualifying disposition, and what the resulting tax implications will be. This can help individuals make informed decisions about whether to participate in an ESPP, how much employer stock to purchase, and when to sell it.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.