ESPP - Employee Stock Purchase Plans: A Guide to Understanding and Maximizing Benefits
ESPPs (Employee Stock Purchase Plans) are stock compensation plans offered by companies, allowing employees to purchase company stocks using their after-tax salary. These plans involve three key time periods: the Offering Date/Grant Date, Purchase Date, and Disposing Date.
During the Offering Date, employees choose to participate in the company's ESPP, and the company begins deducting money from their payroll to accumulate funds on their behalf. When the predetermined Purchase Date arrives, the company uses these funds to purchase company stocks at a discounted price, typically 15% off the fair market value (FMV).
Tax obligations come into play when selling the stocks on the Disposing Date. It is crucial to adjust the cost basis on your tax return accordingly.
When selling the stocks, there are two forms of disposition:
Qualifying Disposition: This requires meeting two conditions: holding the stocks for more than 2 years from the Offering Date to the Disposition Date and holding the stocks for more than 1 year from the Purchase Date to the Disposition Date.
Disqualifying Disposition: This refers to situations where the above two conditions are not simultaneously met.
The choice between the two forms of disposition depends on individual circumstances and can vary in terms of tax advantages. Disqualifying dispositions may sometimes result in greater tax savings. It is essential to assess each situation carefully.
Note: It is important to retain the 3922 form provided by the company as it contains information that may not be included in the 1099-B form provided by the brokerage.
Please note that this information is provided for general informational purposes only and should not be considered as professional tax advice. For professional analysis and tailored advice, please contact us. Thank you.