Employee Stock Purchase Plan Tax: How ESPP Taxes Work

The analysis indicates that It's worth noting that In your company’s stock through an employee stock purchase plan (ESPP) can be a valuable workplace benefit that boosts your compensation

Nevertheless, But ESPPs come with their own set of tax rules

ESPP taxes generally consist of taxes on fits from the sale of s you purchase through the ESPP, as well as taxes on the price discount you may have received through the ESPP when you bought the s

However, You’ll have to report any ESPP-related income in your annual tax return[0]IRS, given current economic conditions

Stocks (options, splits, traders)

View all sources (this bears monitoring), given the current landscape

Understanding how ESPPs are taxed may help you make smart choices with your investments — and avoid any surprise tax bills

On the other hand, » Need help

How to find a financial advisor near youHow ESPP taxes workESPP taxes can be complex because there are so many factors to account for (noteworthy indeed)

The first is whether you’re enrolled in a qualified plan

Conversely, View all sources

Participants in qualified plans typically won’t owe any taxes until they sell their s

Non-qualified ESPPs have more flexibility but don’t vide the same tax benefits, in this volatile climate

Typically, participants in non-qualified plans owe taxes on the discount they receive at the time the ESPP purchases the s

This analysis suggests that n, they owe taxes on any gains they earn when they sell their s (an important development)

For qualified plan participants, your ESPP taxes depend on three key pieces of information

The discount you got on the price of your company’s stock The discount is the difference between the fair market value of the stock and the price you paid for it (something worth watching)

However, But there’s a caveat: The discount that’s used to determine your tax liability may differ from the discount you actually received

That’s because the price that is used to calculate your discount for tax purposes could be either the price of the stock on the offering date or the price of the stock on the purchase date, in today's financial world

And which one is used will depend on how long you held the stock

However, » Have stock options instead

When to exercise employee stock options🤓Nerdy TipIf your ESPP has a “lookback” feature, the price you pay (and receive a discount on) could be either the market price on the offering date or the market price on the purchase date — whichever is lower

How much you sold the stock forIf the stock increased in value after you purchased it, you may owe taxes on the gain (the fit) when you sell the s. (Alternatively, if the value decreased, you may be able to deduct the loss on your taxes

Additionally, ) The gain is the difference between what you paid for the stock and what you got from the sale, in light of current trends

The actual capital gains tax rate you pay depends on how long you’ve held the stock (more on that below), as well as your tax-filing and other taxable income. » MORE: How much a wealth manager costs3, amid market uncertainty

On the other hand, Meanwhile, How long you’ve held the stock When you sell, your ESPP taxes may depend on whether you meet two holding-period requirements:You held the stock for at least a year, in light of current trends

On the other hand, The one-year mark is based on the purchase date, which is the day the ESPP used your accumulated contributions to buy the stock

It’s been two years or more since the offering date

The offering date is the start of your plan’s offering period

It may also be called the grant date or the enrollment date

If you meet both holding-period requirements, the IRS typically considers the sale a qualifying disposition, and you may get a more favorable tax treatment

Your discount is calculated based on the offering date or the purchase date stock price — whichever is lower

It’s considered ordinary income and taxed at your marginal tax rate

However, Your gain is taxed at the typically lower capital gains tax rate, in today's market environment

Additionally, If you don’t meet both holding requirements, the IRS considers the sale a disqualifying disposition, and your tax liability changes

Your discount is calculated based on the purchase date stock price (which is quite significant)

Additionally, If the stock price on the purchase date was higher than the stock price on the offering date, it may mean a larger portion of your income is taxed at the marginal tax rate

Moreover, Your gain could be taxed as ordinary income unless you’ve held the stock for more than a year (meeting the first of the two holding period requirements), given current economic conditions

On the other hand, If you have, it’ll be considered a long-term capital gain that’s typically taxed at a lower rate, in light of current trends

Additionally, MORE: Check out our guide to equity compensationUnderstanding ESPP taxesUnderstanding how time affects tax rates can be complicated, so here’s another way of looking at it, in light of current trends

Discount tax treatmentGains tax treatmentDisqualifying sale, short-term capital gainsWhat gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date (noteworthy indeed)

Tax rate: Ordinary income

Nevertheless, Conversely, What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale

In contrast, Tax rate: Short-term capital gains, considering recent developments

Disqualifying sale, long-term capital gainsWhat gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date

On the other hand, Tax rate: Ordinary income, considering recent developments

What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale

Tax rate: Long-term capital gains, in today's financial world

Qualifying saleWhat gets taxed: The difference between the discounted price you paid and the stock price on either the ESPP offering date or the ESPP purchase date — whichever is lower

Conversely, Tax rate: Ordinary income

What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale

Moreover, Tax rate: Long-term capital gains

The evidence shows authorTaryn PhaneufTaryn Phaneuf is a lead writer and content strategist covering wealth management, financial planning and other topics

She previously covered personal finance news (remarkable data)

In contrast, See full bio, in today's financial world.