Employee Stock Purchase Plan

Today TaxMama hears from Rick in the Tax Quips Forum with set of questions. “I have a tax question about my company stock purchase plan. I elected to contribute ($5,000) to the plan last year and it runs from Oct 1, 2010 till Oct 1, 2011. The benefit of the plan is that I receive a 15% discount on the company stock price at either Oct 1, 2010 or Oct 1, 2011; whichever price is lower. The current stock price is $90.00 per share. The price on Oct 1, 2010 was $70.” He’s got several questions about this transaction.


Dear Rick,

No, I don’t believe this has been added to your payroll yet. It should get added to your wages when you exercise the option.

When you do cash it in, you will be paying for the stock. You will exercise the option. As you say, you have two choices – 1) Buy AND sell the stock on the same day, or 2) Buy the stock and hold it.

Either way, the difference between the current market price and your purchase price will get added to your wages right now. Withholding will be taken. You won’t pay taxes on $5,000. That money came out of your own wages, after tax. You will only pay taxes on the profits.

If you sell the stock on the same day, you won’t have any profits at all. In fact, you will have a small loss – the amount of any brokerage fees. Why? Because when the 15% profit is added to your wages, it’s as if you had paid that additional money to buy the stock. So your total basis (purchase price for tax purposes) will be your option price plus the amount added to your wages, which will equal 100% of the market price. The small loss will be short term, since you bought and sold on the same day.

However, if you exercise the option (just buy it) and leave the stock in your brokerage account, you can build a long-term capital gain. You must hold on to the stock for 1 year plus a day. So if you think the stock is going up in value, buy and hold.

The federal and state taxes on that 15% difference won’t be significant – perhaps $500 or less, assuming instant profits of under $1,500. You may want to check the numbers with your benefits department before making a final decision.  Enjoy the windfall!

And remember, you can find answers to all kinds of questions about employee stock purchase plans and other tax issues, free. Where? Where else? At www.TaxMama.com.

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