Understanding ESPP Stock and its Manipulation

An employee stock purchase plan
allows the worker to buy stock in their company at a reduced price. It
is considered compensation and when the shares are bought, you are not
required to report them as compensated income.

What you do with those shares will affect how they are to be
reported. For instance, if you give your shares as a gift to someone or
if you sell them, you will have to report that manipulation. If you
should die while you are holding said shares, they may in fact appear
on the final tax return.

Dispositions that Don’t Qualify

Any gift or sale of the disposition is considered disqualifying. The
only way out of this is if it has been over a year since the shares
have been purchased and it longer than two years since the offering
period for said stock was in effect. Most ESPP plans have a period of
offering of a year or less and even if you hold onto your shares for a
year and a few days this still won’t be long enough to circumvent a
disqualifying disposition.

As an example, let’s say that the company you work for has a six
month ESPP period of offering. You buy you shares and fourteen months
later you want to sell them off. This means that it is still a
disqualifying disposition even though the shares were held for more
than a year. You didn’t hold on to said shares for the two year grace
period from when the stocks were offered. In order to steer clear of a
disqualifying disposition you would be required to hang onto your
shares for at least twenty months or more.

The Difference in Taxes

Even if you have avoided the disqualifying disposition by holding on
to your shares for the required time period it may not mean you will
not have to report compensation if you decide to sell your shares. This
is the major difference between stock options you receive as an
incentive and the ESPP plan. Just because you hang on to your shares
for a longer period of time doesn’t always mean that the compensation
income is eliminated.

The rules can seem a bit hazy when you get down to brass tacks so it
is always recommended that before you sell or give away your shares
that you speak to a financial expert that can guide you to the right
decision. Those with sizeable compensations need to investigate further
how they should manipulate their ESPP plan, especially in cases where
the price of the stock has declined sharply.

You can do some research on the internet that will allow you to
figure out the calculations on your tax responsibility for your
particular situation as it relates to ESPP plans. If you feel confident
enough that you have the knowledge to make the right decision for your
maximum tax benefit, then go right ahead and do so. Those that feel
that wading into the waters of financial matters can quickly pull them
under should indeed contact a financial specialist so that they make
the best decision regarding their tax situation.