Buying discounted company stock

[El_Mariachi]

Question for you elite mustachinvestors out there

My company recently rolled out a employee stock program (before it was RSU unit sales) that every quarter we can buy company stock at a 15% discount based on the lowest price from that quarter

In my head I am on board, but I wanted to look more at the details like tax liabilities I may not be thinking of.

What I have in my head is, but the stock, turn around sell, put the money into my portfolio, rinse repeat

I know there is a capital gains because I havent held it for a year and 1 day correct? but anything else?

Thanks!

[Stimpy]

I believe that is it as far as taxes go.  Depending on the company, and the amount of the purchase it might be worth it to wait for that year and a day BUT, that is something you should decide based on your short/long term tax brackets.

Of course, you sure that whomever is running the program doesn't charge a sales fee/commission?  Cause that would be the only other possible cost I see from this.

[Boll weevil]

A couple other things to at least keep your eye on:
* will the gains push you into the next tax bracket
* see if you can have taxes withheld at the time of sale, or adjust your paycheck withholding to cover the investment income. Otherwise you could end up owing a lot when you file next year
* if you have a Roth IRA, there are income limits where you can’t contribute if you make too much.

I’d also second the recommendation of looking at the fee structure of the provider. Computer share is one of the providers I know of, and it seemed they had a fee for everything, including dividends.

[yachi]

If you're willing to hold about a year's worth of company stock, you could turn these short term gains into long term gains:
Year 1:
1st quarter: buy $2,000 (say 100 shares)
2nd quarter: buy $2,000 (say 100 shares)
3rd quarter: buy $2,000 (say 100 shares)
4th quarter: buy $2,000 (say 100 shares)
Year 2:
1st quarter: Sell 100 shares from 1st quarter of Year 1, buy 100 more shares
2nd quarter: Sell 100 shares from 2nd quarter of Year 1, buy 100 more shares
3rd quarter: Sell 100 shares from 3rd quarter of Year 1, buy 100 more shares
4th quarter: Sell 100 shares from 4th quarter of Year 1, buy 100 more shares
Year 3:
1st quarter: Sell 100 shares from 1st quarter of Year 2, buy 100 more shares
2nd quarter: Sell 100 shares from 2nd quarter of Year 2, buy 100 more shares
3rd quarter: Sell 100 shares from 3rd quarter of Year 2, buy 100 more shares
4th quarter: Sell 100 shares from 4th quarter of Year 2, buy 100 more shares

You're only ever holding 400 shares of company stock, but since you staggered your selling by a year, all the buying and selling after year 1 is long term gains.

[Systems101]

What I have in my head is, but the stock, turn around sell, put the money into my portfolio, rinse repeat

The tax law is way more complicated than what you suggest.  So might the rules in your plan get in the way...

...since you staggered your selling by a year, all the buying and selling after year 1 is long term gains.

This is not necessarily true.  You need to know the offering period and the purchase period.  The offering period matters.  Some are 6 months, some are years.  It produces bizarre results that are hard to compare between companies.

You also need to know if the plan is qualified.

You also need to read the rules of the plan.  One past employer of mine would boot you from the plan if you sold any shares from an offering period during that offering period.  Since they were 2 years long, that definitely controlled behavior.  (I didn't participate - no lookback period, not enough discount, not a healthy company)

Holding for too short a period produces regular income, not short term capital gains.  You need to do a lot more reading.  This is an intro: https://www.fool.com/investing/2017/08/02/how-to-get-the-most-from-your-employee-stock-purch.aspx

Don't let that deter you though, being able to purchase with a lookback period (lowest price that quarter) plus a discount is fantastic.  Definitely investigate.

[bwall]

There's worse things that could happen than a 15% overnight return from the lowest price in the quarter-- a price which could be substantially lower than the price at the time it's offered to you, thus making the return much greater than 15%.

I presume the company is listed on the stock exchange and the price would be calculated on the lowest closing price of that quarter. Seems like a no-brainer to me.

But, as the other say, the devil is in the details.

[shuffler]

I know there is a capital gains because I havent held it for a year and 1 day correct? but anything else?

Please see this excellent explanation (and link to IRS docs) by SeattleCyclone.

... but the thing to recognize here is that you are always going to pay ordinary income tax rates on the discount (i.e. the 15%) that your plan offers.

Here's a random link from Weathfront that I thought also explained it decently when I last looked it up.
   "Gains solely attributable to the discount are always taxed at ordinary income rates (at the time of sale)."

FWIW, my own plan is quarterly-based and offers a 10% discount off the current price at the end of the quarter.  It's less fancy than yours.  I simply buy and then immediately sell to realize that 10% gain.  With an IRS-mandated $25k annual contribution limit, I view it as a Rube-Goldberg raise of my salary by $2.5k, since it's treated as ordinary income and I pay my ordinary income tax rate on it (just like the rest of my salary).  It's better than a swift kick.

[El_Mariachi]

What I have in my head is, but the stock, turn around sell, put the money into my portfolio, rinse repeat

The tax law is way more complicated than what you suggest.  So might the rules in your plan get in the way...

...since you staggered your selling by a year, all the buying and selling after year 1 is long term gains.

This is not necessarily true.  You need to know the offering period and the purchase period.  The offering period matters.  Some are 6 months, some are years.  It produces bizarre results that are hard to compare between companies.

You also need to know if the plan is qualified.

You also need to read the rules of the plan.  One past employer of mine would boot you from the plan if you sold any shares from an offering period during that offering period.  Since they were 2 years long, that definitely controlled behavior.  (I didn't participate - no lookback period, not enough discount, not a healthy company)

Holding for too short a period produces regular income, not short term capital gains.  You need to do a lot more reading.  This is an intro: https://www.fool.com/investing/2017/08/02/how-to-get-the-most-from-your-employee-stock-purch.aspx

Don't let that deter you though, being able to purchase with a lookback period (lowest price that quarter) plus a discount is fantastic.  Definitely investigate.

Great link and advice, I will look into the plan details to find out the fees, if the plan is qualified and the offering period sell rules

its a pretty healthy company, that being said if I didnt work here I wouldnt necessarily buy the stock, its pretty stable, not booming, but not going down, dividend isnt great

so the part that has confused me is the capital gains vs regular income, I will have to read more into that since it was one of the few things I thought I understood hahaha

I know there is a capital gains because I havent held it for a year and 1 day correct? but anything else?

Please see this excellent explanation (and link to IRS docs) by SeattleCyclone.

... but the thing to recognize here is that you are always going to pay ordinary income tax rates on the discount (i.e. the 15%) that your plan offers.

Here's a random link from Weathfront that I thought also explained it decently when I last looked it up.
   "Gains solely attributable to the discount are always taxed at ordinary income rates (at the time of sale)."

FWIW, my own plan is quarterly-based and offers a 10% discount off the current price at the end of the quarter.  It's less fancy than yours.  I simply buy and then immediately sell to realize that 10% gain.  With an IRS-mandated $25k annual contribution limit, I view it as a Rube-Goldberg raise of my salary by $2.5k, since it's treated as ordinary income and I pay my ordinary income tax rate on it (just like the rest of my salary).  It's better than a swift kick.

thanks for the links I will read up a little more

so seems like you are in a similar situation and its working for you I take it?

thats exactly as how I was viewing it, a defacto raise/higher savings rate

[Financial.Velociraptor]

Before FIRE I had a 15% discount twice a year.  I always maxed it out.  The IRS rule at the time was if you sold within 3 years the discount became ordinary income.  Lots of people maxed out their contribution cap and sold the next day.  I was an "insider" and had lockout periods that left me holding shares long term.  I sold it all the day after I retired.