Thanks. I will likely sell most when the next window opens.
As for taxes on the ESPP, I thought you pay a much lower rate if you hold onto it for 2 years. Is this the case? I assume you'd say it's not worth it still.
If your ESPP meets the statutory guidelines for special tax treatment (probably does), the taxes go down somewhat after 2 years (likely 1.5 in reality), but not enough that it should make a huge difference in your decision-making most of the time.
The holding period for special tax treatment is defined as two years from when the option to buy the stock is granted (i.e. the date the price calculation is set). A pretty typical structure for these ESPPs is to have six-month offering periods where you buy shares at the end of the period for a discount off the price at the beginning. If that describes your plan, you need to wait two years after the start of the offering period for the special tax treatment, or 1.5 years after you actually purchase the shares.
How special is this tax treatment really? Not much.
If you sell before the end of the two-year period, the entire discount off the fair market value on the day you bought the shares counts as regular compensation income and is taxed accordingly. Any additional gain above and beyond this is a capital gain, taxed at short-term or long-term rates depending on whether you owned the shares for a year.
If you wait to sell after the end of the two-year period, there's still going to be some compensation income. It's just that the date moves back to the beginning of the offering period, and the discount off that price now counts as compensation instead of the discount off the price on the date you bought the shares.
A bit of income switches from regular rates to long-term capital gains rates. That's all.
Example:
Your company's shares are worth $100 on January 1 2018. By July 1 the shares go up in value to $110. On that date your ESPP lets you buy shares for 15% off the lower of the January 1 or July 1 price, so you pay $85.
If you sell immediately for $110 you pay regular income tax on $25 of wage income ($110 - $85). No capital gains income. If your regular income tax rate is 25%, you pay $6.25 in tax, meaning you receive $18.75/share of financial benefit from the ESPP ($110 sale price - $85 purchase price - $6.25 tax).
If you wait until January 1 2020 to sell, and the shares are still worth $110 at that time, you now pay regular income tax on $15 of wage income ($100 - $85) and $10 of long-term capital gains ($110 - $100). If your regular income tax rate is 25% and your capital gains rate is 15%, you now owe only $4.75 in taxes, meaning you receive $21.25/share of financial benefit from the ESPP ($110 - $85 - $4.75).
Selling immediately gives you an instant 22% after-tax return on your investment. Waiting two years gives you a 25% return instead. Is that extra 3% worth tying up a bunch of money in a single stock for two years? I lean toward no.
If the stock had doubled in value during that six-month offering period rather than increasing by a modest 10%, we have a bit of a different situation. The potential tax savings goes up pretty significantly. You'll have to decide for yourself where the line between "worth the risk" and "not worth the risk" is. Most of the time, when the stock doesn't go up a huge amount, you'll probably want to just sell right away going forward.
