Anyone Have Experience with Employee Stock Purchasing Programs (ESPP)?

[StarTech]

For many years I participated on the ESPP at the company I worked for. The terms varied over the years from exceptionally good to just a 5%, at which point I dropped it. Over time, I let the shares pile up, reinvesting dividends. At some point I sold a big portion of the holding and diversified. Overall we are glad we did it.

But you have to understand the tax handling of the sales. It has been a while... As far as I know, if I recall, you need:

- Your share cost, that is your discounted net (there may be a yearly fee)
- The average market price of the share on the purchase date (historic prices are available online)
- How much do you sell the share for.

If you sell short term, that is before holding for 12 months, the IRS asks you to count the capital gains as regular income, so you pay at your tax bracket.

If you sell long term, then the IRS wants you to consider the discount your employer gave you then, as regular income now, when selling, and the rest as long term capital gains which will most likely be 15%. It gets a bit convoluted depending on how good or bad a given share did (losses). Splits if any have to be accounted for as always.

I am sure you can find details in finance forums (and IRS doc). Commissions in and out can be used to net values. I remember the plan administrator charged a yearly fee, not a commission, just a few $. For sale, I think it was $30/lot.

The plan administrator provides reports of share (fractions) by date and cost. The plan normally has some way of checking this online.

If there are dividends being reinvested, either the company will report the shares(fractions) resulting from the dividends and the cost. These shares are not discounted, so they just generate capital gains long term.

Whenever I sold a lot, I knew if it was from discounted or reinvested. I loaded a spreadsheet with a row for each purchase, went online for historical market prices and figured out the taxes. Was quite a bit of work, worth it...

Over time I came out with substantial life savings, taxed at lower rate than the savings resulting from the 401K.

So yes, I would do it again. I would probably sell earlier, but it worked well for me.

 

[Red Squirrel]

Are you the one stuck having to figure out all the tax stuff or is that done by the ESPP program? For us I'm pretty sure we get a form in the mail for that, so as far as I know I don't have to do anything I just give it to my tax person. I gave my withdrawal receipt this year to my tax person but she said I should get something in the mail for next year. I think it's either a T3 or a T5.

At least that's what I hope as I've never sat down and figured out any of the math.

 

[s0me0nesmind1]

Are you the one stuck having to figure out all the tax stuff or is that done by the ESPP program? For us I'm pretty sure we get a form in the mail for that, so as far as I know I don't have to do anything I just give it to my tax person. I gave my withdrawal receipt this year to my tax person but she said I should get something in the mail for next year. I think it's either a T3 or a T5.

At least that's what I hope as I've never sat down and figured out any of the math.

For ESPP (to my knowledge, correct me if I'm wrong) you have 0 tax reporting duties unless you sell.

If you do sell, you will be supplied with a 1099-B - which should be fairly easy to submit.

 

[s0me0nesmind1]

For many years I participated on the ESPP at the company I worked for. The terms varied over the years from exceptionally good to just a 5%, at which point I dropped it. Over time, I let the shares pile up, reinvesting dividends. At some point I sold a big portion of the holding and diversified. Overall we are glad we did it.

But you have to understand the tax handling of the sales. It has been a while... As far as I know, if I recall, you need:

- Your share cost, that is your discounted net (there may be a yearly fee)
- The average market price of the share on the purchase date (historic prices are available online)
- How much do you sell the share for.

If you sell short term, that is before holding for 12 months, the IRS asks you to count the capital gains as regular income, so you pay at your tax bracket.

If you sell long term, then the IRS wants you to consider the discount your employer gave you then, as regular income now, when selling, and the rest as long term capital gains which will most likely be 15%. It gets a bit convoluted depending on how good or bad a given share did (losses). Splits if any have to be accounted for as always.

I am sure you can find details in finance forums (and IRS doc). Commissions in and out can be used to net values. I remember the plan administrator charged a yearly fee, not a commission, just a few $. For sale, I think it was $30/lot.

The plan administrator provides reports of share (fractions) by date and cost. The plan normally has some way of checking this online.

If there are dividends being reinvested, either the company will report the shares(fractions) resulting from the dividends and the cost. These shares are not discounted, so they just generate capital gains long term.

Whenever I sold a lot, I knew if it was from discounted or reinvested. I loaded a spreadsheet with a row for each purchase, went online for historical market prices and figured out the taxes. Was quite a bit of work, worth it...

Over time I came out with substantial life savings, taxed at lower rate than the savings resulting from the 401K.

So yes, I would do it again. I would probably sell earlier, but it worked well for me.

Thanks for your point of view.

Based on all the other inspirational posts here - I'm investing the max 10% of my paycheck @ 15% discount.

Since it's an overall fairly stable stock, I don't really have a reason to sell - though I probably will occasionally just to diversify on a LTCG basis.

 

[Red Squirrel]

For ESPP (to my knowledge, correct me if I'm wrong) you have 0 tax reporting duties unless you sell.

If you do sell, you will be supplied with a 1099-B - which should be fairly easy to submit.

Oh ok that's good to know. So I just give that form to my tax person and call it a day.

 

[StarTech]

Oh ok that's good to know. So I just give that form to my tax person and call it a day.

The 1099-B will report the purchase cost vs sale transaction, but not the regular income due to the discount gift you receive at purchase time. Some companies, if you are still on the payroll, may report the discount on the W-2 of the year of sale. In my case that was not the case. In either case, you are responsible for the taxes inputed on that regular income. This is a snippet from Fidelity's help pages:

"Your company may report your ESPP income after you sell your stock on your W-2 as wages in box 1 if you are an employee. Even if your company does not report the income from an ESPP as compensation on your W-2, you are still responsible for properly reporting and paying tax on the amount of ordinary income. You have no withholding for income tax, Social Security, or Medicare. In addition, you may owe tax on any capital gains resulting from the sale of your stock, which is explained in later steps. "