How do capital gains taxes apply to employee stock purchase plans?
Understand how capital gains taxes apply to employee stock purchase plans and the taxation considerations for employees.
Capital gains taxes can apply to Employee Stock Purchase Plans (ESPPs) in the United States when you sell the shares acquired through the plan. The tax treatment of ESPPs depends on several factors, including the type of plan and the holding period of the shares. Here's an overview:
Qualifying vs. Non-Qualifying Plans:
- Qualifying ESPP: If you participate in a qualified ESPP, you may be eligible for favorable tax treatment. Generally, these plans offer tax benefits on both the purchase and sale of shares.
- Non-Qualifying ESPP: Non-qualifying ESPPs do not provide the same tax advantages as qualifying plans. You will owe taxes on the difference between the purchase price and the market value of the shares on the purchase date when you sell the shares.
Purchase Price and Discount:
- With both qualifying and non-qualifying ESPPs, you typically purchase shares at a discount from the market price. The difference between the purchase price and the market price on the purchase date is called the "bargain element." This bargain element may be subject to taxation.
Taxation at Purchase:
- For qualifying ESPPs, the bargain element is often not subject to taxation at the time of purchase. Instead, it may be subject to capital gains tax when you sell the shares.
- For non-qualifying ESPPs, the bargain element may be taxed as ordinary income at the time of purchase.
Taxation at Sale:
- When you sell ESPP shares, the tax treatment depends on the holding period:
- If you sell qualifying ESPP shares more than two years after the offering date and more than one year after the purchase date (known as a "qualifying disposition"), the gain may be treated as a long-term capital gain. This means you'll likely pay lower capital gains tax rates on the profit.
- If you sell qualifying ESPP shares before meeting the holding period requirements, the gain may be treated as ordinary income.
- For non-qualifying ESPP shares, any gain between the purchase price and the sale price is generally subject to capital gains tax. The holding period does not affect the tax treatment of non-qualifying ESPPs.
- When you sell ESPP shares, the tax treatment depends on the holding period:
Reporting: Your ESPP administrator will provide you with a Form 1099-B or a similar statement that summarizes the sale of ESPP shares. You will need this information to report your capital gains or losses on your tax return.
It's essential to consult with a tax professional or use tax software to accurately calculate and report your capital gains taxes related to ESPPs, as the rules can be complex, and tax rates can change over time. Additionally, the specific terms and conditions of your ESPP may affect your tax liability, so it's crucial to understand the details of your plan.
Capital Gains Taxes and Employee Stock Purchase Plans: Taxation Considerations.
When you sell stock that you purchased through an employee stock purchase plan (ESPP), you will be subject to capital gains taxes. The amount of tax you owe will depend on your holding period and your tax bracket.
Holding period
If you sell the stock within one year of purchasing it, you will be taxed on the capital gain as ordinary income. This means that the capital gain will be taxed at your regular income tax rate.
If you sell the stock more than one year after purchasing it, you will be taxed on the capital gain as a long-term capital gain. This means that the capital gain will be taxed at a lower rate than your regular income tax rate.
Tax bracket
The capital gains tax rate is progressive, which means that it increases as your income increases. The long-term capital gains tax rates for 2023 are as follows:
- 0% for taxpayers with taxable income of $41,775 or less (single filers) or $83,550 or less (married filing jointly)
- 15% for taxpayers with taxable income of more than $41,775 but less than $459,750 (single filers) or more than $83,550 but less than $517,200 (married filing jointly)
- 20% for taxpayers with taxable income of $459,750 or more (single filers) or $517,200 or more (married filing jointly)
Taxation considerations
If you are planning to sell stock that you purchased through an ESPP, there are a few things you should keep in mind:
- Holding period: If you can, try to hold the stock for more than one year before selling it. This will allow you to qualify for the lower long-term capital gains tax rate.
- Tax bracket: If you are in a high tax bracket, you may want to consider selling the stock in multiple years to spread out the capital gain and reduce your tax liability.
- State taxes: Some states have their own capital gains taxes. Be sure to factor in your state taxes when calculating your overall tax liability.
If you have any questions about the capital gains taxes that apply to ESPP stock, you should consult with a tax advisor.