Equity compensation
employee stock purchase plan
An employee stock purchase plan, or ESPP, lets you buy your employer's stock through payroll deductions, often at a discount. Tax depends on how long you hold the shares.
An employee stock purchase plan (ESPP) lets you buy your employer's stock through payroll deductions, often at a discount to the market price. The IRS treats a qualifying plan as a statutory stock option plan. You generally owe no tax when you receive or exercise the option. You owe tax when you sell.
A round example. For example, say the plan lets you buy a $100 share for $85. If you sell right away, the $15 gain is generally taxed as pay. If you hold the shares long enough to meet the special holding period, more of the gain can be taxed as a capital gain. These numbers are for illustration only. Check your plan document for its real discount and dates.
After your first sale or transfer, your employer sends Form 3922. It lists the dates and values you need for your return.
Why it matters to your plan. An ESPP can build a large position in one company. That adds tax questions and concentration questions. Talk with your CPA before you sell, and read our equity compensation guide.
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