Frequently Asked Questions

If you participate in an ESPP, you’ll likely hear the terms qualifying disposition and disqualifying disposition. These terms speak to holding period requirements for your ESPP shares that impact how and when your sale proceeds will be taxed.

A qualifying disposition is a final sale of ESPP that meets the following two requirements:

1. The final sale of your shares occurs at least two years from the grant/offer date, AND
2. The final sale of your shares occurs at least one year from the purchase date.

Generally speaking, if you meet the qualifying standard and profit from the transaction, the discount from the purchase price received (if any) is taxed as ordinary income, and other proceeds are taxed as a long-term capital gain/loss. If you have a disqualified sale, you’ll generally pay ordinary income on profit.

ESPPs are notoriously complicated when it comes to tax, but you can learn more here.

ESPPs might allow you to contribute up to a maximum percentage of salary, like 10 to 15 percent. Some companies may also allow you to contribute a fixed amount. You can contribute at your chosen contribution rate until you reach the maximum allowable annual limit of $25,000 per year (for a qualified plan).

In either case, remember that contributions to a plan come from your paycheck — which means the more you contribute, the less take-home pay you have. Learn more

An ESPP is a convenient way to buy shares of your company stock, as contributions are often deducted pre-tax directly from payroll. In addition, ESPPs may allow you to buy stock at a discount from the FMV (up to 15%) and/or at a lower price based on a lookback provision (a lookback provision may allow you to purchase stock at the better of the purchase date price or the price on the grant date/offering date of the plan).

The combination of ease of funding and a potentially discounted purchase price make a good ESPP a valuable employee benefit

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Your plan document can tell you how your employee stock purchase plan works, but there are still details to dig into before you can understand if using your ESPP is the best choice for you.

In addition, you’ll want to consider your personal cash flow. Contributions to an ESPP will often be deducted from payroll. This results in less take home pay while your funding the plan.

You’ll also want to develop a strategy regarding when to sell the stock. Option 1 is to sell the stock immediately upon purchase, selling as a disqualifying sale and removing stock risk. Option 2 is to hold the stock until the shares reach qualified status and obtain preferential long term capital gains on some or most of the gain.