Poll

How Do you Do ESPP's?

Sell Immediately
2 (18.2%)
Wait >= 1 year for LT Capital Gains
3 (27.3%)
Wait >= 2 years for Qualified Dispositions
3 (27.3%)
I don't have ESPPs at my Workplace
2 (18.2%)
Hedging Strategy/ Other
1 (9.1%)

Total Members Voted: 10

Voting closed: November 04, 2018, 05:41:19 PM

Author Topic: Sell ESPP or Wait for LT Capital Gains?  (Read 558 times)

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Sell ESPP or Wait for LT Capital Gains?
« on: October 09, 2018, 07:05:43 PM »
Hi everyone,

I've been fortunate enough to been granted ESPP with a lookback price at ~$100, with the stock currently at ~$250. I'm buying at ~$85 due to a 15% discount.

Should I sell now or wait for LT capital gains to kick in one the first batch in ~5 months and the 2nd batch ~11 months from now?

I'm at my current target AA by having increased my bond, int'l stock and small and mid cap US allocations in my other retirement accounts.

What would you do?

Thanks!

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #1 on: October 09, 2018, 07:09:14 PM »
Edit: Those 5 and 11 month dates would also be the dates the holding periods would be met.

Once that happens, the whole gain from $88 to the selling price would be taxed at a LT capital gain AFAIK

For context, I'm in early career, and those shares are ~40% of my investment accounts and ~30% of my total net worth. I have a fully funded EF and maxing out all available retirement accounts.
« Last Edit: October 09, 2018, 07:22:43 PM by joy_of_index »

RWD

  • Magnum Stache
  • ******
  • Posts: 2630
  • Location: Mississippi
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #2 on: October 09, 2018, 09:07:33 PM »
How likely is the stock to decrease by more than you would owe in taxes while you wait? I would be pretty uncomfortable with so much of my net worth tied up in one stock that is also tied to my job.

I have a relative who lost over a million dollars waiting for long term capital gains in the dot com crash and because of the AMT on unrealized gains had to liquidate just to cover taxes and break even. I'm having trouble finding information on whether this is still a thing though.

MDM

  • Walrus Stache
  • *******
  • Posts: 8771
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #3 on: October 09, 2018, 09:36:17 PM »
I have a relative who lost over a million dollars waiting for long term capital gains in the dot com crash and because of the AMT on unrealized gains had to liquidate just to cover taxes and break even. I'm having trouble finding information on whether this is still a thing though.
Maybe Dispositions of ESPP Stock Fairmark.com is relevant.

Marley09

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #4 on: October 10, 2018, 08:17:12 AM »
How likely is the stock to decrease by more than you would owe in taxes while you wait? I would be pretty uncomfortable with so much of my net worth tied up in one stock that is also tied to my job.


This.  I went through this same thought process when determining to sell my ESPP a year after purchasing (mandatory hold time) or waiting an additional year until the 2 year qualified disposition date.  In doing the math, if my companies stock price dropped as little as $.75, then it was a wash on holding until the qualified disposition date or selling after a year and paying the regular taxes.

PlainsWalker

  • 5 O'Clock Shadow
  • *
  • Posts: 93
  • Age: 34
  • Location: Oklahoma City, OK
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #5 on: October 10, 2018, 09:15:55 AM »
I already have a lot of eggs in my employer's basket since I rely on them for a steady paycheck. So I sell my ESPP shares as soon as I reach the holding period requirement to minimize my exposure to the company's performance. Doing so also lets me stick closer to my target asset allocation since nowhere in my investor policy statement do I say: "Own individual stocks". The match is generous in the ESPP I have access to so I accept the risk and gratefully enjoy the purchase discount and just de-risk as soon as I can.

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #6 on: October 10, 2018, 12:57:18 PM »
@PlainsWalker Good to know. Do you wait for the 1 year holding shares + 2 years after the beginning of the offering period, or do you sell immediately?

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #7 on: October 10, 2018, 01:14:36 PM »
@RWD I really have no idea how likely or not.

I am though uncomfortable with holding that much also. 

The current price is ~$250. Spreadsheeting it out, the breakeven future price is ~$202.

Any lower and it's more advantageous to sell now than wait for meeting the holding periods in early March and early September next year, any higher and it's better to take the tax advantage.

So what's the risk that the price drops <$202 5 months and 11 months from now?

Here's the stock btw: https://www.google.com/search?q=nvda. Large tech company that joined the S&P 100.

Thanks!



joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #8 on: October 10, 2018, 01:17:43 PM »
One more factor is that I'm going through a job search at the moment. And depending what I find, there's a chance I will be with another tech company for professional reasons in the next 6-12 month timeframe.

That would derisk having large stock positions in the company that I work for.

If I were a betting person, I'd put that probability at ~50%.

Thanks!

RWD

  • Magnum Stache
  • ******
  • Posts: 2630
  • Location: Mississippi
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #9 on: October 10, 2018, 01:23:53 PM »
The current price is ~$250.

Wow, it was ~$287 a week ago...

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #10 on: October 10, 2018, 01:29:14 PM »
@RWD Yeah it's pretty volatile!


PlainsWalker

  • 5 O'Clock Shadow
  • *
  • Posts: 93
  • Age: 34
  • Location: Oklahoma City, OK
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #11 on: October 10, 2018, 04:29:53 PM »
@PlainsWalker Good to know. Do you wait for the 1 year holding shares + 2 years after the beginning of the offering period, or do you sell immediately?

    My plan has a one year holding requirement and I unload the shares I purchase as soon as possible. The company is fairly large and stable so we haven't experienced huge price swings and have ridden along with the rest of the market. When I've run the numbers for selling as soon as I've hit the holding requirement versus waiting until two years after the grant date its been such a small difference that I've opted to get my asset allocation in line over the marginal gain from waiting to hit the qualified mark.

joy_of_index

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #12 on: October 14, 2018, 06:42:49 PM »
Just for fun, a new poll on top!

How Do you Do ESPPs?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4522
  • Age: 34
  • Location: Seattle, WA
Re: Sell ESPP or Wait for LT Capital Gains?
« Reply #13 on: October 15, 2018, 11:15:41 AM »
Edit: Those 5 and 11 month dates would also be the dates the holding periods would be met.

Once that happens, the whole gain from $88 to the selling price would be taxed at a LT capital gain AFAIK

For context, I'm in early career, and those shares are ~40% of my investment accounts and ~30% of my total net worth. I have a fully funded EF and maxing out all available retirement accounts.

This bolded bit is probably not true. The taxation of these ESPP plans is a bit complex. See my post from an old thread about how it works.

No matter how long you hold the stock, ESPP shares bought at a discount will have some income taxed at regular income rates when you sell. Before the holding period is met, the entire discount off the purchase date fair market value is taxed as regular income. After the holding period is met, the entire discount off the lookback date fair market value is taxed as regular income. The applicable fair market value will also generally be your cost basis, and you'll pay capital gains tax on the difference between your sale price and your cost basis.

In most cases I'd say that you should just sell the shares immediately because most of the benefit of the ESPP occurs on the date you buy the stock for a discount; any further tax benefit from meeting the holding period is pretty minimal in comparison to the discount, and requires you to hold a potentially volatile investment for some time in order to get it. The risk/reward just isn't there in most cases. However in your case the difference in fair market values on the two applicable dates is quite large. The larger this difference, the more likely that waiting for the holding period to elapse before selling will pay off. It's still a risk, but one that's a bit more worth taking.