The discount is always taxed as ordinary income. The type of tax you owe on any gains above the discount depends on how long you hold the stock. This is known as a qualifying or disqualifying disposition. A qualifying disposition is when you sell your shares for more than a year after the purchase date and more than two years after the offering date. In this case, any gains above the discount are taxed at capital gains tax rates.
David M. Staples
If you do not satisfy both requirements for a qualifying disposition known as a disqualifying position , any gains above the discount are taxed as ordinary income. When deciding if it makes sense to participate, there are two major considerations: your current financial situation and your cash flow. Before deciding to participate, take an assessment of your current financial situation.
Do you have at least three months of an emergency fund saved? What about high-interest debt such as credit cards or personal loans? When you participate in an ESPP, your paycheck is reduced by the amount you contribute.
Consumer Staples
Ideally, you should be in a position where the smaller paycheck does not impact your regular living expenses. There are some situations where ESPPs may not be worth the hassle. After you purchase your ESPP shares, you can decide to keep or sell them. You have three basic options:. When deciding whether to keep or sell, consider the following:.
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Having a large portion of your net worth tied to a single stock is very risky, and the risk increases when that single stock is in the company that pays your salary. You may also have other types of equity compensation such as stock options or you already own shares of stock from vested Restricted Stock Units RSUs.
Most of my clients could accelerate their short-term financial goals by selling ESPP shares. If this is the case for you, it makes sense to sell the shares as soon as possible after the purchase date. The proceeds can be used to pay off your student loans or help you reach your savings goals faster. An ESPP with a generous discount and a lookback provision is a no-brainer.
Consumer Staples Select Sector SPDR ETF
Just like the employer match to your k contributions, ESPP discounts are essentially free money. If you can afford it, contribute the maximum and sell the stock as soon as possible. Did you enjoy reading this post? Directional Trading.
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