ESPP Question

[APBioSpartan]

Hello!

I read this thread often (sometimes daily) and have always read that the general advice is to sell your ESPP shares as soon as they are vested and buy more VTSAX, or whatever you fancy.  However, what if your company is doing extremely well (like... say....UNH)?  Still sell?  Hold onto them for a few years?

[MDM]

Hello!

I read this thread often (sometimes daily) and have always read that the general advice is to sell your ESPP shares as soon as they are vested and buy more VTSAX, or whatever you fancy.  However, what if your company is doing extremely well (like... say....UNH)?  Still sell?  Hold onto them for a few years?

Or like... say... that Fortune 5 company: FORTUNE 5 in 2002: Enron

[ixtap]

What if that company has a major scandal break next month?

[MayDay]

You already have  your employment status and possible your 401K match (if it is company stock) dependent on the performance of one company.  We prefer to diversify.

My H gets 15% of his salary into his ESPP and gets a 15-25% discount.  We sell immediately.  Our agreement is that he can hold an amount is less than ~10% of our total non-retirement brokerage account,  to get LT capitol gains.  We will still sell it as soon as the tax rate drops, though.  Right now we spent down our brokerage account to buy a house so it will be awhile before we hold any. 

[RussellMania]

My understanding is that the discount value is always taxed as regular income, regardless of when you sell. If you sell immediately, there is effectively no capital gains, so short term vs. long term capital gains rate doesn't matter.

In general, if you think the higher return of your company's stock is greater than the expected return of the broad market, when adjusted for the risk of your assets and your cash flow being tied together, then it might make sense to hold your company stock.

However, it is a general principle of this community that nobody knows which individual stocks are going to outperform the market.

[surfhb]

Diversify!   

Just having a job there already invests you in the company.     You are taking on extra risk is all.    It may work out, it may not?   

If it doesn't, you lose your job and your retirement savings.... waa waa waa waaaaaaa   ;)

[KungfuRabbit]

My understanding was you need to hold for two years for the discount not to be taxed as income.

I'm in the same boat. Yes the logic everyone will tell you is sell right away, but that's reallllly hard for a stock doing so well. 

I just sold $25,000 of my company stock that was $4,000 cost basis (at bottom of market recession...), in using the money to fund a basement remodel. The annoying thing is selling that much pushes us in to the Obamacare extra capital gains tax, so cashing out even more would be a massive tax bill.

I did at least make a small change this year. I turned off automatic dividend re investing, so that'll be $5,000 or so a year less compounding in company stock.  And I'll sell enough company stock to fund my ROTH IRA.  With those two things though the stock account will just keep going up though. However, if it does Enron I will be hurt but not totally screwed, it's *only* 15% or so of my net worth (way higher than recommended, but if it went to zero I'd be fine). One of my best friends also has his wife work there, they both buy and have never sold, and their ONLY not 401k money is company stock, so 60% of net worth probably. It's worked out GREAT for them so far ...

But. Do as I say, not as I do. Diversity all yours...

[damyst]

My understanding was you need to hold for two years for the discount not to be taxed as income.

Wrong. The discount is taxed as income, full stop.

An ESPP can make you money in up to three ways:

1. The fixed discount offered vs. the Fair Market Value of the shares, e.g. 15%.

2. If the stock goes up during the ESPP period, your cost is still calculated using the lower FMV that existed at the start of the period. This looks like a stock market gain, but it's not - you never actually purchased the assets until the end of the ESPP period. It's therefore taxed as income, because it is income.

3. Once the period is over and the shares are purchased, they are now yours, and can appreciate or decrease in value like any other stock. As others have noted, you're already way overexposed to this particular company, so it makes sense to ditch the shares immediately.

You don't have any more insight into the stock's future behaviour than anyone else does. Or, if you do, and you attempt to leverage that in your trading, that would constitute securities fraud - which is not a strategy that this forum recommends (despite the obvious cost-of-living advantages of time spent in prison..)

[seattlecyclone]

If you buy the shares at a discount, some amount will be taxed as regular income. If you hold the shares for at least two years after the option was granted (often 1.5 years after you actually purchase, if your ESPP uses six-month offering periods), some (but not all!) of the regular income may become capital gains instead. When you meet the holding period you get to count the discount off of the original price at the beginning of the offering period as income. Otherwise the (often larger) discount off the value on the purchase date counts as regular income.

Regardless of how long you hold the shares, the 1099 you receive from your broker will be wrong. See this thread from a couple of years ago for more detail.

I encourage you to think twice about keeping the shares for the whole holding period just to pay a little bit less in taxes. You get most of the potential benefit of your ESPP on the day you buy the shares, in the form of the discounted purchase price. The additional tax benefit that you get from holding the shares an additional 18-24 months is pretty small in comparison, and in order to receive it you need to keep a rather large percentage of your money in one single stock.

[RidetheRain]

It's also worth noting that ESPP is typically an after-tax deduction from your paycheck which means that the majority of the money you will get from your sale is already taxed. If you have a 15% discount it's probably best to just treat the discount as 7% or whatever and waltz happily away from stock you wouldn't have chosen for yourself.

[RelaxedGal]

We hold for one year, then sell.  That moves us from short term to long term capital gains.  We choose to do this with the caveat that one year's ESPP is still less than 10% of our investments.  Most of my husband's coworkers quick sell.

The current great run up (NVDA, check the 3 year on that!) has me spooked and wanting to sell it all, but we're holding the course and sticking to the one-year-hold plan.

[seattlecyclone]

We hold for one year, then sell.  That moves us from short term to long term capital gains.

You do understand that selling immediately will generally result in ~$0 of capital gains, right? The discount will be taxed at regular income tax rates even if you hold for a year. Only the change in value from the purchase date will be taxed as a capital gain.

If you've already held the stock for a few months and it has gone up in value, then waiting until the one-year mark could save a bit on taxes. For future purchases you should be aware that none of your existing profits as of the purchase date will be taxed at a lower rate on the one-year mark.

As I explained in my previous post, waiting until 18 months can result in lower taxes on part of that original discount. I don't generally think that tax benefit is generous enough to compensate for the risk of holding much of your employer's stock for that long, but reasonable minds can disagree on that point.