Employee Share Purchase Plan - What to do?

[tomatops]

Hi All,

I'm a Canadian and am starting a new gig. It offers 15% share discount on a stock traded on the NYSE, with no vesting period, meaning I can buy it and sell it right away.

From the Canadian tax perspective here, the discount is a taxable benefit, but if I understand correctly, my ACB would be the market price. So for instance, a share is $100, I buy it for $85, get taxed on the $15 benefit immediately, and any selling/Capital gains/losses is based on the purchase price of $100 from the eyes of the CRA.

My question is how often should I be selling? I am an index investor and am unsure about putting 15% salary in one stock, no matter how much I believe in the company. Then again, I feel partially inclined to still have some stock in case the company goes to town and does really well!

For reference, this is a fairly mature Fortune 500 company that's been around for decades.

Thoughts?

[jc4]

The rule of thumb is is buy all you can and re-sell imediately. You cash in on 15% minus taxes return over just a couple days.

If you want to continue to hold that's a decision to invest in a single stock. Most here would advise against the correlated risk of also being employed by the same company.

Personally, we're holding. We can pay 0% or 12% LTCG instead of 20% on the immediate sell. It's a small enough portion of our total that I'm fine with the risk.

[terran]

I'd buy as much as you can an sell as quickly as you can up to whatever limits are placed or all of your income. That's effectively a 15% raise (up to the limit you're allowed to purchase) less trading fees.

If you decide to hold any of for any period try to avoid making it a high concentration of your overall portfolio. Having a high concentration in a single stock is to be avoided, and doubly so when the value of that stock is tied to your non-investment income.

[RangerOne]

Max it out and sell immediately is the only reasonable strategy unless you have a damn good reason for holding onto a lot of company stock.

If you talk to co-workers you will likely find a shocking number don't follow this simple advice. People do all kinds of crazy shit.  Like try to wait out the 1-2 year period to be able to get a lower tax rate on the capital gains portion.

Or they just hold all their company stock indefinitely. At my last company this worked out for most people because lucky for them company stock steadily climbed for at least the past 18 years. But in reality if they didn't need the money they probably would have been better off selling it and merging it into a post tax diversified investment.

So basically just nod your head and proceed to ignore people that try to explain all the reasons you should not sell right away...

[COEE]

I'm not sure about Canadian taxes/tax brackets, but if it's like the US, if you buy a $100 share for $85 and you're in a 22% tax bracket then you'll pay $3.30 in taxes.  If you sell immediately there are no additional taxes.  So for $85, you walk away with $96.70.  That's an instant 9.51% return on investment.  I'd challenge you to find someplace you will receive this kind of guaranteed ROI other than an employer retirement match. 

This is no-brainer territory.  Generally speaking, you should sell immediately (again, taxes count here and I'm not in Canada and don't fully understand your tax code).

However, should you consider holding the shares longer, it's important to create an IPS to determine what your risk profile is for such an investment.

Note that depending on your position within the company there may be blackout periods that you are not able to buy or sell your stock.

[tomatops]

Fabulous - Thanks all for the advice! Just even doing an assessment of the share price of this company - as it is fairly mature and not say, a startup with lots of exponential growth potential, I'll probably max out the ESPP and sell it right away. 15% return ain't that bad and I'll take the guaranteed return any day.

Also: from the Canadian tax perspective, I'll be in the 43.41% (!) tax bracket, so my gain per share on an after tax basis on a $100 share price bought for $85 would be $8.49 per share. Still not half bad.

[ixtap]

The rule of thumb is is buy all you can and re-sell imediately. You cash in on 15% minus taxes return over just a couple days.

If you want to continue to hold that's a decision to invest in a single stock. Most here would advise against the correlated risk of also being employed by the same company.

Personally, we're holding. We can pay 0% or 12% LTCG instead of 20% on the immediate sell. It's a small enough portion of our total that I'm fine with the risk.

In the US, you pay your regular income tax rate on the discount no matter when you sell. Only any gain above the purchase price is subject to capital gains.

[Neo]

Whenever I see this topic come up it seems like most people with an ESPP don't have any selling restrictions which is great for you. My company has a rule that if you sell any amount of your ESPP stock you cant buy again for 6 months.  We also have a limit that you can only purchase $10k of ESPP stock per year. The way I approach this is to buy $10k worth of stock as quickly as possible and then sell it as soon as I reach $10k. This limits the length of time I'm exposed to a single stock, but there is still risk. Is my company weird for having the 6 month selling suspension?