Author Topic: Employee Stock Purchase Program  (Read 13628 times)

moneymamma

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Employee Stock Purchase Program
« on: May 29, 2014, 08:53:14 PM »
I work for Microsoft and have the opportunity to participate in the ESPP and buy the stock at a 10% discount. It is on a quarterly basis and uses the last price of the quarter.  I already have a decent amount of stock in MSFT.  Should I participate?  I would probably hold and then sell as I wouldn't want to make short-term capital gains tax.

Emg03063

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Re: Employee Stock Purchase Program
« Reply #1 on: May 29, 2014, 09:27:05 PM »
Yes, assuming MSFT isn't overvalued by more than 10%.  I'd think about writing covered calls on the stock, just to limit my exposure.

butchmonkey

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Re: Employee Stock Purchase Program
« Reply #2 on: May 29, 2014, 09:34:45 PM »
How long must you hold it?

A 10% discount to the market is tough to pass up.

But if you can buy it in a tax protected account I would convert it to index funds the minute it was legal to do so.

Even if it were in a taxable account I would probably convert it to low-cost index funds as soon as possible to get away from The uncompensated risks of owning a single company.

It's worth mentioning that the uncompensated risk of owning a large amount of stock in your own company is particularly dangerous. If Microsoft declares bankruptcy you will likely lose your job at the exact same time that your stock portfolio collapses.





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Daisy

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Re: Employee Stock Purchase Program
« Reply #3 on: May 29, 2014, 09:37:26 PM »
We have an ESSP at my company. Several people ran the numbers (yes we are engineers) and it made sense to join and then sell immediately after you received your shares. Think of it as forced savings with an automatic 10% gain in one quarter. Actually, if you annualize it, it looks even better. Much better than a savings account!

If you hold it you run the risk of the stock going below your purchase price and then it wouldn't have been worth it at all. It will get taxed as short term income, but just think of it as interest you'd receive from a savings account.

Of course, the company I work for had some years of declining stock, so that shaded our opinion too.

msilenus

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Re: Employee Stock Purchase Program
« Reply #4 on: May 29, 2014, 10:35:28 PM »
Howdy.  Another 'softie here.  Welcome.  The short story is: Take The Free Money, Sell The Stock Right Away, Be Careful At Tax Time.

The slightly longer version is that the way the ESPP works is it takes a slice of each paycheck out, and puts it in a cash account.  At the end of the 3-month offering period, they buy you stock at a 10% discount, you suffer some tax liability (goes on your W-2) and you own stock at a discount.  Yay.  Let's compute what that looks like in terms of RoR, as if the money waiting in the account were an investment that paid out on the purchase date.

Well, you just instantly made 10% on the money you put in.  Each dollar you had in the account was in there for, on average, 1/2 the offering period, 1/2 * 1/4 = 1/8 of a year.  It doesn't compound, but that's still an 80% annualized rate of return.  Take that and run!

By that I mean: sell immediately.  There are some theoretical scenarios where, roughly two years out, you wind up with some preferential tax treatment if you held that long and the stock went down.  Otherwise, it's just income plus some miniscule short term capital gains.  Just pay the taxes on it.  If you start accumulating MSFT via payroll deductions, you'll quickly wind up wildly overexposed to the company.  I tried to strike a middle ground on this for a while, when I wrongly thought the tax advantage of holding was significant.  There is no middle ground.  Just get the money into an index fund or something.

Watch out on your taxes.  The trustee reports the purchase price as the cost basis.  That's wrong!  You paid income taxes on the 10% discount already.  You'll need to correct (raise) the cost basis on your lots when filing.

- -

Okay, maybe the money isn't quite free.  But it's pretty close, and once you learn how to do the taxes right, the effort is minimal.  The net effect is a small raise.  Congratulations.  I'll PM you with a trick that can sort of help on the tax front in most years.
« Last Edit: May 29, 2014, 10:42:45 PM by msilenus »

SmallBets

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Re: Employee Stock Purchase Program
« Reply #5 on: May 29, 2014, 11:11:45 PM »
Very helpful post msilenus! I have been maxing ESPP and quick selling with great success - the forced savings and locked in gains make it a no brainer IMO.

On the tax part, how is it that you pay tax on the discount already? I'd be interested in that PM shortcut too, pretty sure I messed this up on my taxes.

msilenus

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Re: Employee Stock Purchase Program
« Reply #6 on: May 29, 2014, 11:26:58 PM »
Sorry, what I PM'd our OP isn't a helpful for anyone outside the company.  The intent of taking that offline was to keep things relevant, or at least applicable, to others here.

If you're selling right away, I think multiplying the basis by 1.1111 is always right though, isn't it?

Daisy

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Re: Employee Stock Purchase Program
« Reply #7 on: May 29, 2014, 11:37:35 PM »
If you're selling right away, I think multiplying the basis by 1.1111 is always right though, isn't it?

Ours is a little different. We get a 15% discount and it's for a 6 month period. We get the 15% discount on the lesser of the stock price on the first day vs. the last day of the 6 month period. So we get AT LEAST 15% on our money in 6 months. Usually, we can get up to like 20% if the stock price was lower at the beginning of the 6 month period.

I usually put in about $10k per period and walk away with $12-13k for a $2-3k gain in 6 months. Not bad!

msilenus

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Re: Employee Stock Purchase Program
« Reply #8 on: May 29, 2014, 11:57:48 PM »
Oh, right.  Those plans are super awesome.  Congratulations on having one!

not_a_trex

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Re: Employee Stock Purchase Program
« Reply #9 on: May 30, 2014, 12:33:20 AM »
I don't completely agree with just buying and selling immediately. Part of the reason companies do this is they want their employees to have a stake in the company. I see selling everything immediately as a minor ethical dilemma, but I don't think or expect everyone to agree with me on this.

That aside, maybe I don't understand how the selling works. I assume you are taxed when the money comes out of your paycheck to go towards the discounted stocks. Are you not taxed again on the difference between when you bought (90% for OP) and the current price (100%) if you sold immediately?

msilenus

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Re: Employee Stock Purchase Program
« Reply #10 on: May 30, 2014, 01:03:06 AM »
The money that goes into the account is after-tax money.  The discount is further income.  The discount causes you to buy more shares than you could have with the money that you put in, so it's not double-taxation or anything.

I don't think it's an ethical issue.  No one is being mislead.  I'm sure they'd prefer everyone bought-and-held, but the incentives just don't work out that way.  It's a little odd to say "Here's a program to help align our incentives.  We're hoping you ignore your own incentives by participating in the program in a suboptimal way, so that our incentives wind up aligning better."  That's pretty tortured --do incentives govern, or not?  Still, I'm sure many people do hold their stock, if for no other reason than the tax law is confusing enough that people don't really understand the incentives. 

Personally, I think it'd be better policy to cancel the ESPP and move the budget into boosting stock award compensation.  Simpler for us, no cost-basis BS, and the company holds the stock for us for years so we keep the exposure.
« Last Edit: May 30, 2014, 01:05:55 AM by msilenus »

Daisy

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Re: Employee Stock Purchase Program
« Reply #11 on: May 30, 2014, 01:14:00 AM »
I don't think it's an ethical issue.  No one is being mislead.  I'm sure they'd prefer everyone bought-and-held, but the incentives just don't work out that way.  Still, I'm sure many people do hold their stock, if for no other reason than the tax law is confusing enough that people don't really understand the incentives. 

I agree that it's totally ethical to sell. Honestly, most employees just hold on to their stock for the very reason the OP suggested - they want to avoid short term capital gains - even if they thought that much about it at all. Actually, most people hold on because they think the stock market always goes up. That may be true for an index, but for an individual stock not so much. Only the financially savvy people in my company tend to be the quick sellers. We hold hallway conversations right after the issuance to discuss the actual clearing date in our account so we can sell as quickly as possible.

I know plenty of people that are underwater on their ESPP because they held on waiting for the long term gains while the stock languished in the meantime.

Another reason why it's ethical is that we don't always agree with the strategic decisions the executives make, so why should we tie our capital to a declining stock? Our executives sell their personal share of stocks when it's convenient for them too.

Personally, I think it'd be better policy to cancel the ESPP and move the budget into boosting stock award compensation.  Simpler for us, no cost-basis BS, and the company holds the stock for us for years so we keep the exposure.

Shhh... Now that is crazy talk! I hope no one in my company reads this advice.

Actually, I agree with you that giving out stock options is more of an incentive than the ESPP. However, my company stopped handing out stock options as rewards. I think the ESPP might have started right about that point, although I can't really remember.

As I mentioned before, my company's stock had been in a long term decline when the ESPP was first announced. So many of us owned previously rewarded stock options that were worthless at their exercise date - so not much of a reward after all. Maybe that's why they went with the ESPP - at least you own the stock.

Even if the stock price goes up after you sell, you still gain because you'll make those gains on the stock during the next purchase period. If the stock goes down the next period, you still make money. It's the best thing since sliced bread!
« Last Edit: May 30, 2014, 01:40:58 AM by Daisy »

msilenus

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Re: Employee Stock Purchase Program
« Reply #12 on: May 30, 2014, 01:44:59 AM »
I was talking about stock, not options.  Stock only becomes worthless if the company goes under.  Lots of large companies include raw stock in their compensation plans.  Options are great for startups because they let you pay people in lottery tickets that you mint yourself, so you don't have to raise nearly as much cash, and they really can make normal employees rich.  They're not as strong for mature companies, which expect to survive downturns and recessions over and over again.

MaxTheTerrible

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Re: Employee Stock Purchase Program
« Reply #13 on: May 30, 2014, 07:53:17 AM »
Why not sell a portion of your existing holding in MSFT and just hold your ESPP shares for a year?
(that's what I do with my company espp). That way you avoid short term cap gains and still continue to hold a stake in the company.

msilenus

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Re: Employee Stock Purchase Program
« Reply #14 on: May 30, 2014, 10:36:51 AM »
You're manufacturing tax events for yourself.  The ideal holding period for a stock is infinity, but your strategy is essentially to build a year of capital gains, then pay a cut out of it to the government, then diversify.  I did that myself for a while, but it's bad.  Much better to sell immediately and avoid the capital gains altogether, then try to hold a mutual fund to infinity instead.

Reducing tax events is why buy and hold is good.

Daisy

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Re: Employee Stock Purchase Program
« Reply #15 on: May 30, 2014, 10:44:05 AM »
My opinion is that if you want to hold it long term because you like your company's prospects and want to be a long term stock holder in your company, then go ahead.

But don't hold it long term for the sole reason of avoiding short term capital gains. Short term capital gains are taxed at your marginal income tax rate. So just think of any gain as a bonus, interest earned in a savings account, etc. By trying to time the selling of the stock, you run the risk of losing the 10% or 15% discount your company "bonused" you with if the stock price goes down.

And really...what tax bracket are you in? Try to calculate the difference in the tax you'd pay by selling immediately vs. holding for long term gains. 15% long term capital gains vs. (assuming a highly paid engineer) a 25-28% marginal tax rate on $2k gain. Is it worth the aggravation?

msilenus

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Re: Employee Stock Purchase Program
« Reply #16 on: May 30, 2014, 11:14:52 AM »
Agreed that building a stake can make sense if you believe in the company and such.  But if you're doing that, you should go an offering period or three building a stake (whatever makes sense to avoid overexposure) and hold that forever; then switch to selling immediately.

The more important point on the short term capital gains from selling right away is that there aren't any short term capital gains if you get the cost basis on your stock right, and do the trade right away.  The discount is ordinary income, and holding for a year won't reduce your tax liability for the discount, so selling when the discount is your entire gain doesn't have any capital gains implications at all.  (Again: you have to remember to correct your tax basis if your plan administrator doesn't report the basis correctly.)  In practice, you might get a partial day of stock fluctuation before you sell, and on occasion that will matter, but it's essentially noise.  Even assuming the stock is going up in general, you'd tend to harvest small losses almost as often as you book small gains.
« Last Edit: May 30, 2014, 11:16:28 AM by msilenus »

Daisy

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Re: Employee Stock Purchase Program
« Reply #17 on: May 30, 2014, 11:20:34 AM »
The more important point on the short term capital gains from selling right away is that there aren't any short term capital gains if you get the cost basis on your stock right, and do the trade right away.  The discount is ordinary income, and holding for a year won't reduce your tax liability for the discount, so selling when the discount is your entire gain doesn't have any capital gains implications at all.

True. Your program is different than mine in that we can encounter short term capital gains if the stock price at the beginning of the 6 month period is less than at the end of the period. The more I think about our plan, the more I love it...I sure hope everyone at my company is taking advantage of it!

msilenus

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Re: Employee Stock Purchase Program
« Reply #18 on: May 30, 2014, 12:11:13 PM »
Daisy, you're right to be skeptical of what I'm saying because I do have less experience with your kind of plan.  However, based on my (possibly flawed, esp. in your case) understanding of how ESPPs are structured, the point holds for yours as well.

My understanding is that your before-and-after feature is built as a kind of options contract.  So in offering periods where the stock goes up, you would have two taxable events on the purchase date:
1) Your discount being applied (ordinary income.)
2) Realizing the gain on the option exercise (whatever the hell options gains are treated as.  Probably short term capital gains in this case?)

Taken together, they would bring your cost basis in the security all the way up to the purchase price.  So if you sold immediately, with no change in security price between purchase and sale, you would have no capital gains.

You should certainly check me on this.  (And, belated disclaimer: everyone should check everything else I said earlier, not professional advice, yada yada yada.)  But if I'm right then there's a pretty good chance that many of your prior dispositions had the cost basis wrong enough that filing amended returns might make sense.  In your shoes, I would be contacting HR and Payroll, to ask how the ESPP discount is tracked on their end for both the %discount and the offering-period discount.  Your goal would be to figure out how and if (1) and (2) make it into your W-2, and if that happens on the purchase date.  They might have some resources specifically for helping employees figure out how this stuff works.  Your plan administrator might also be of help.

Daisy

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Re: Employee Stock Purchase Program
« Reply #19 on: May 30, 2014, 07:39:14 PM »
I apologize if I sounded skeptical, because I am not. I think we are both on the same page with trying to encourage the OP to join the ESPP and sell right away.

As far as the taxes, it does appear on our W2. I import it all into TurboTax and let it do its magic. Maybe I should double check to make sure TT handles it correctly. Thanks.

Roland of Gilead

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Re: Employee Stock Purchase Program
« Reply #20 on: May 30, 2014, 08:13:09 PM »
For softies, don't make a mistake on your income taxes with the ESPP.

They include the ESPP discount of the fair market value of the stock as income on your W2 and you pay income tax on it.

Fidelity then issues you a 1099 that shows your basis incorrectly as the discounted price.

You file your taxes using the 1099 info and end up paying tax twice on the same money.

I finally caught this in 2008 or so and was able to amend returns from 2005 to 2007 but before that Uncle Sam got a lot of double tax from us.

Example:  $25,000 in ESPP shares, purchased at $22,500.  W2 box something shows a code and $2500.  If you add up your paystubs you will see you paid income tax on the $2500.   Fidelity sends you a 1099 that shows your basis incorrectly is $22,500 in the stock instead of $25,000.  You pay about $700 in extra tax in error.  You feel like a idiot.

msilenus

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Re: Employee Stock Purchase Program
« Reply #21 on: May 30, 2014, 08:22:47 PM »
I apologize if I sounded skeptical, because I am not. I think we are both on the same page with trying to encourage the OP to join the ESPP and sell right away.

As far as the taxes, it does appear on our W2. I import it all into TurboTax and let it do its magic. Maybe I should double check to make sure TT handles it correctly. Thanks.

We have a saying in this business: garbage in, garbage out.  TT reads in what your plan administrator sends you on your 1099.  I think for our return it prompted me to confirm the cost basis for my ESPP lots because while the plan administrator doesn't get the cost basis right, they *are* nice enough to put a footnote on ESPP lots saying, in effect "we really don't know what we're talking about here."  So TT asks during the interview.  (I think.  I've only done TT once.)  If your administrator doesn't put in that footnote, you'd have to switch to the forms view to correct the basis.  Of course, if your administrator gets the cost basis right, then you're golden.  Long story short (too late!): what you need to do in TT has way more to do with what your plan administrator is doing than what TT is doing.  TT only has what they send to work with.

Nothing wrong with being skeptical.  It's a virtue.  Some people take skepticism the wrong way.  That's something to work on, IMO.

clifp

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Re: Employee Stock Purchase Program
« Reply #22 on: May 30, 2014, 11:44:56 PM »
Howdy.  Another 'softie here.  Welcome.  The short story is: Take The Free Money, Sell The Stock Right Away, Be Careful At Tax Time.

The slightly longer version is that the way the ESPP works is it takes a slice of each paycheck out, and puts it in a cash account.  At the end of the 3-month offering period, they buy you stock at a 10% discount, you suffer some tax liability (goes on your W-2) and you own stock at a discount.  Yay.  Let's compute what that looks like in terms of RoR, as if the money waiting in the account were an investment that paid out on the purchase date.

Well, you just instantly made 10% on the money you put in.  Each dollar you had in the account was in there for, on average, 1/2 the offering period, 1/2 * 1/4 = 1/8 of a year.  It doesn't compound, but that's still an 80% annualized rate of return.  Take that and run!

By that I mean: sell immediately.  There are some theoretical scenarios where, roughly two years out, you wind up with some preferential tax treatment if you held that long and the stock went down.  Otherwise, it's just income plus some miniscule short term capital gains.  Just pay the taxes on it.  If you start accumulating MSFT via payroll deductions, you'll quickly wind up wildly overexposed to the company.  I tried to strike a middle ground on this for a while, when I wrongly thought the tax advantage of holding was significant.  There is no middle ground.  Just get the money into an index fund or something.

Watch out on your taxes.  The trustee reports the purchase price as the cost basis.  That's wrong!  You paid income taxes on the 10% discount already.  You'll need to correct (raise) the cost basis on your lots when filing.

- -

Okay, maybe the money isn't quite free.  But it's pretty close, and once you learn how to do the taxes right, the effort is minimal.  The net effect is a small raise.  Congratulations.  I'll PM you with a trick that can sort of help on the tax front in most years.

I think this advice is generally right (my big tech company ESPP had 15% discount but otherwise similar to MSFTs).   However there are times when I think it make sense to hold for the full two years in order to take advantage of preferential treatment of capital gains.

So for example lets say that Mr Market decides the Microsoft (MSFT) is much more valuable company under new management and in the next 6 months the stock goes from $40 to $60.
You can buy the stock at $36 if you sell it immediately at $60 and you would have $24 gain if you are in the 33% tax bracket (if you don't live in Washington this could be higher due to state income taxes) you'd owe $8 in taxes..
If you wait for an additional 18 months you only owe $3.60 LT cap gains in taxes (15% $24). I think the extra $4.40/share in after tax profit is significant.  Certainly there is a risk in the next 18 months that stock could go down, bu there is also at least as likely chance the stock will go up in the next 18 months.  Now obviously if you have high interest debt that selling the stock to pay down the debt makes more sense..

But other than that specific case I agree sign up for the program the rate of return is fantastic and sell as soon as possible to avoid having too much concentration in  company stock.

shuffler

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Re: Employee Stock Purchase Program
« Reply #23 on: May 31, 2014, 01:14:06 AM »
... sell as soon as possible to avoid having too much concentration in  company stock.
There are considerations beyond just the stock you're holding in your taxable account.

If you work at Microsoft, you are probably already "invested" in Microsoft in terms of paycheck, the future value of unvested stock awards, and quite probably a significant part of your home's value.  Should something significantly bad happen to Microsoft, all of these assets (using the term loosely) would decline.

I would recommend against holding company stock (i.e. would recommend selling ESPP immediately) simply as a matter of diversification.  In my opinion, this goes for most companies.

clifp

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Re: Employee Stock Purchase Program
« Reply #24 on: May 31, 2014, 02:18:31 AM »
... sell as soon as possible to avoid having too much concentration in  company stock.
There are considerations beyond just the stock you're holding in your taxable account.

If you work at Microsoft, you are probably already "invested" in Microsoft in terms of paycheck, the future value of unvested stock awards, and quite probably a significant part of your home's value.  Should something significantly bad happen to Microsoft, all of these assets (using the term loosely) would decline.

I would recommend against holding company stock (i.e. would recommend selling ESPP immediately) simply as a matter of diversification.  In my opinion, this goes for most companies.

All true but you can hedge much of your risk through the use of options. Especially in the case of Microsoft which has long term options available you could purchase a near the money 18 month option for less than cost of your tax saving.. Thus almost eliminating the downside risk while retaining the upside.

crypie

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Re: Employee Stock Purchase Program
« Reply #25 on: May 31, 2014, 04:56:53 PM »
I have an ESPP program and have seen it change several times:
  • the amount of discount (10%-15%)
  • length of time you must hold the stock after it is purchased (0 days -> 6 months -> 3 months)
  • calculation of the purchase price

My point is that it seems companies have a lot of flexibility in how they structure these programs so you really need to understand your specific program.

The other factor that weighs in for me (and probably others) when trying to decide how long to hold the purchased shares is any additional restrictions on when you can sell stock. If you're an insider, then you likely have a fairly short window when you can actually sell your shares. Depending on what you plan to use the money for, this can be a strong argument for selling as soon as possible so that the money is more liquid.[/list]

RapmasterD

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Re: Employee Stock Purchase Program
« Reply #26 on: May 31, 2014, 06:50:48 PM »
I hate MSFT, think it makes shitty products, and hope it goes out of business.

But at the same time let's face it -- MSFT is an enduringly great company, and yes, an extremely well run company, particularly now in the post-Ballmer era. FWIW, I've met many top caliber people from MSFT.

You should throw everything you can against that ESPP and then do quick sales each time. This is beyond a no brainer. Best of success to you.

RapmasterD

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Re: Employee Stock Purchase Program
« Reply #27 on: May 31, 2014, 07:02:58 PM »
I don't completely agree with just buying and selling immediately. Part of the reason companies do this is they want their employees to have a stake in the company. I see selling everything immediately as a minor ethical dilemma, but I don't think or expect everyone to agree with me on this.

That aside, maybe I don't understand how the selling works. I assume you are taxed when the money comes out of your paycheck to go towards the discounted stocks. Are you not taxed again on the difference between when you bought (90% for OP) and the current price (100%) if you sold immediately?

Yeah... I don't share this perspective at all. The way I see it, a good and impactful employee already is putting 55 hours per week MINIMUM (usually much more) of hard sweat equity into their company, giving their employer the absolute best they've got.

Said employee isn't necessarily and doesn't necessarily want to be an equity owner of that company.

ESPPs are a form of compensation. If companies had an ethical issue with employees immediately selling ESPP shares, they would, at the very least, not make Quick Sale options available. And for the individual employee, if that compensation is not aligned with one's investment strategy, e.g., to never own individual stocks in general or tech stocks in particular, then why should one have to ethically hold onto a stock?

Sure, one can hold onto a stock to reduce the tax burden. But then s/he is an equity investor in that stock.

ANECDOTE: 11 years ago I spoke with a very wise and very affluent former CFO of a publicly held company who has now gone on to make a huge fortune as a CEO of another publicly held company. His policy was always to dump and run, regardless of tax implications. I have followed that advice ever since. For ESPPs, lock in your modest percentage gains after taxes, and move on.

MikePolo4

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Re: Employee Stock Purchase Program
« Reply #28 on: June 07, 2014, 12:32:08 AM »
The trick that I have found with ESPP is that if you hold the shares for 21 months, you are only taxed the 10% discount at the capital gains rate. What I have done is held ESSP purchases for the first 21 months and then from here on out every 3 months when a new purchase is made I am able to sell the stock purchase from 21 months ago. This way I can sell my company's stock quarterly, but get a lower tax rate on the gains.

Roland of Gilead

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Re: Employee Stock Purchase Program
« Reply #29 on: June 07, 2014, 06:37:32 AM »
The trick that I have found with ESPP is that if you hold the shares for 21 months, you are only taxed the 10% discount at the capital gains rate. What I have done is held ESSP purchases for the first 21 months and then from here on out every 3 months when a new purchase is made I am able to sell the stock purchase from 21 months ago. This way I can sell my company's stock quarterly, but get a lower tax rate on the gains.

You are taxed the 10% discount at your normal income tax rate.  It is reported in your W2 and the employer took the tax out of your paycheck.  If you wait 21 months to sell it is true you will only pay capital gains tax rate on any gains the stock may have made past the fair market value on the day you were granted ESPP shares but if you pay based on the 10% discount basis you have paid double tax (although you waited 21 months to pay double tax).

MikePolo4

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Re: Employee Stock Purchase Program
« Reply #30 on: June 07, 2014, 09:58:37 AM »
Quote
If you wait 21 months to sell it is true you will only pay capital gains tax rate on any gains the stock may have made past the fair market value on the day you were granted ESPP shares but if you pay based on the 10% discount basis you have paid double tax (although you waited 21 months to pay double tax).

Thanks for the warning. I will go back and double check my W2's again, but I have never seen this listed as a code on my W2. If I don't see the code, I am in the clear?

Daisy

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Re: Employee Stock Purchase Program
« Reply #31 on: June 07, 2014, 01:59:36 PM »
I work for Microsoft and have the opportunity to participate in the ESPP and buy the stock at a 10% discount. It is on a quarterly basis and uses the last price of the quarter.  I already have a decent amount of stock in MSFT.  Should I participate?  I would probably hold and then sell as I wouldn't want to make short-term capital gains tax.

I was just talking with a co-worker that has almost all of his savings tied up in our company's stock in an ESPP.

SIGH....

I tried to give him advice but I'm not sure if he was really hearing it. He said he is finally kind of breaking even after many years of buying and holding. Our stock had a lot of down years and then some up years.

I suggested he take the money and run and move to index funds. He then said he knew our company's prospects better than another company. I asked him if he thought our company would do better than the overall market but he gave me a blank stare. I told him it was like playing roulette and putting all of his money on one number.

I was pretty insistent so I hope he takes action. Don't be this guy!!! Don't hold just to avoid a small amount of taxes and then end up in a big hole you can't get out of.

msilenus

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Re: Employee Stock Purchase Program
« Reply #32 on: June 07, 2014, 02:51:23 PM »
Thanks for the warning. I will go back and double check my W2's again, but I have never seen this listed as a code on my W2. If I don't see the code, I am in the clear?

DsqDsp is one place you could see it, if you sold early.  If you didn't sell early, then it might not have a code, and might be just folded into your gross compensation. (Opacity!  Yay!)  Being more likely to get clear and consistent accounting of your ESPP shares on your W-2 is another excellent reason to sell immediately, IMO.

This seems like a relatively lucid treatment of how to handle ESPP dispositions at tax time:
http://fairmark.com/execcomp/espp/qualifying.htm

BTW, I've been meaning to post back here because I've figured out that some of what I was saying earlier was certainly wrong.  Tax on the discount is deferred until time of sale.  That's why you can get a W-2 showing disqualifying dispositions from an employer long after you've left.  This could open up some situations where it might make sense to defer a sale a little bit, ie: in a year in which you've realized a big windfall in terms of income, it might make sense to defer selling ESPP shares from the last half of the year, so that compensation gets moved into the next year.

cambridgecyclist

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Re: Employee Stock Purchase Program
« Reply #33 on: June 09, 2014, 11:50:01 AM »
There is bad math on this thread. A 15% discount is not a 15% gain. It is a ~17.6% gain, minus taxes and transaction fees, if the stock is sold at 100% of its value:

85*1.176 = 99.96

This makes ESPP even more attractive.

gimp

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Re: Employee Stock Purchase Program
« Reply #34 on: June 10, 2014, 02:46:34 PM »
For the plan that Daisy mentioned, a 15% discount on a 6-month period where you get the lower of the beginning price and the end price, the potential gain in share price is in fact taxed as capital gains.

Eg, stock starts at $100 and ends at $120, you get it for $85, you are taxed on $15 as income and $20 as capital gains. The capital gains are short-term if you sell within two years of issuance, I believe, and long-term if you sell after that. (The two year thing is slightly more complicated but it can be summarized as that, in most normal cases.)

At a normal engineer's salary in a high-paid area, that's 28% today - 28% on $15 is $4.20, and 28% on $20 is $5.60, totaling $9.80. If you wait two years, assuming no change from the $120, that ends up being $3, for a total of $7.20. In other words, if you sell immediately you get the difference ($120 less $85 is $35) less taxes ($35 less $9.80 is $25.20). In this synthetic example, that's a gain of almost 30%. If you wait, you get $27.80 which is just under 33%. However if you had sold immediately ($25.20) and invested in an index fund, you should be up to a bit over the $27.80 usually...

So let's consider what can actually happen between purchase and sale.

- Large drop
- Small drop
- Flat
- Small gain
- Large gain

Let's see. If there's a drop, then you shoulda paid the taxes. You might think that if the drop is small, or is flat, or is a slight gain, you won - except you most likely didn't because investing into an index fund would have given a better return. The only time you really win by waiting is if the stock goes up well above the market.

So, do you want to bet that the stock of your company will go up significantly? There's nothing wrong with that belief; I mean, you work for the company, you might be loyal to it... if so, then feel free to keep it. However, you will almost always be better off selling immediately and reinvesting than waiting two years.

Daisy

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Re: Employee Stock Purchase Program
« Reply #35 on: June 10, 2014, 08:31:08 PM »
Nice analysis, Gimp.

Yes now I remember that you have to wait two years (or so) for the long-term capital gains to kick in with my plan. It's just not worth the aggravation to hold.

I hadn't even thought of analyzing it by comparing it to investing in an index fund post-selling. At that point, you ARE betting that your company will do much better than the general market if you decide to hold the stock.

I love those 30% gain 6-month periods. It's usually closer to 15-20% but there have been times we've had such a sweet gain.

ephillipsme

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Re: Employee Stock Purchase Program
« Reply #36 on: June 11, 2014, 09:21:46 AM »
So some ESPP plans have a holding period.  This is something you should be aware of as if you have something like a 3 or 6 month holding period this can add some risk to the ESPP as the rice may decrease in that time frame and reduce the benefit of the discount.

Samsam

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Re: Employee Stock Purchase Program
« Reply #37 on: June 11, 2014, 10:42:10 AM »
well...fellow softie here...going back and checking my taxes....

Donovan

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Re: Employee Stock Purchase Program
« Reply #38 on: June 11, 2014, 11:15:43 AM »
I'm starting to look into the ESPP at my new job and wondered about using it to help pay off some student loans (bad leftovers from recent graduation). I'm currently paying them off aggressively, but I wondered if my ESPP could help me do it at an even faster rate.

Sadly, my ESPP is not nearly as fantastic as some mentioned above (flat 5% discount of the current price on the purchase date, which is at the end of each quarter).  But I did some math and think it's still marginally helpful. Here are my numbers:

Per $95 into ESPP ->  100/95 = 5.26% return per 3 months (ignoring taxes)
Minus Taxes (currently in 15% bracket) -> .0526 * .85 = 4.47% return per 3 months (after taxes)

SL rate = 6.8% annually / 4 = 1.7% interest rate per 3 months

It looks like if I buy in at the same rate that I am currently paying of the student loans anyway, I will ultimately come off 2.77% better (per 3 months, so 11.08% annualized) if I buy into the plan at a high rate, pay only interest payments on the loans most of them time, and then blast the full balance of the ESPP account into them at the end of each quarter. Not tremendous, but it probably shaves a month or so off of my current payment schedule.

Anything that I'm not taking into account, or does that seem about accurate?

gimp

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Re: Employee Stock Purchase Program
« Reply #39 on: June 11, 2014, 12:32:33 PM »
Seems accurate.

As you said, the 6.8% becomes 1.7% per quarter, whereas you're getting 4.47% per quarter. At the end of the year you've paid off more of your loans, except your timing has been a bit weird. Weird timing tends to mean interest rates that are harder to calculate but the 1.7% is much less than 4.47%.

So I agree with your plan. Use ESPP to the max, sell immediately, dump into loans, and make sure you save the 15% of your gain for taxes.

AJDZee

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Re: Employee Stock Purchase Program
« Reply #40 on: June 13, 2014, 08:20:40 AM »
I got burned with my ESPP... looking back I should have bought/sold right away as discussed above.

Just the timing of my employment - I enrolled as soon as I could (which happened to be at the peak of my company's stock price) then over the course of 2 years the price was cut almost in half and stayed there for another 3 years.

I stopped contributing, sat around waiting. I knew there was a much better place for my money so finally I cut the cord when there was a spike in the price. (still at a capital loss though) ...That little spike in price turned out to be the beginning of an additional 30% rally, which I missed out on.

But I don't have any regrets... I decided I had too much invested in one company, it was all in non-registered accounts (which bothered me), and even with my company's rally in the last 6 months, my new diversified portfolio is still larger than it would have been if I kept my money in my company stock! :)

It just sucks that regardless if you have capital gains or losses, I still had to pay marginal tax on the 15% discount.
At least I used my capital loss to get back some taxes I paid on capital gains back from 2010. Had I waited any longer, that wouldn't have been an option.

Unique User

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Re: Employee Stock Purchase Program
« Reply #41 on: July 15, 2014, 10:56:09 AM »
Does anyone hold onto stock in their ESPP?  Ours works a bit differently, we have $500 taken out of his monthly paycheck (the max) and they match 15%.  Stock gets purchased monthly and the 15% shows up as income on his paycheck.  We have about 15k in there right now which is a tiny percentage of our non real estate stach.  The stock keeps slowly going up and pays dividends, so we've just held onto it.  I checked and looks like it's rate of return has been in the 19% for the last several years.  The company has been around for 100 years and isn't in tech or energy.   We just upped the amount to the the max (duh) and I knew at some point we should sell some of it, but didn't think I had gotten to that point yet. 

I also have another ESPP from years ago that we have held onto purely out of laziness, but with stock splits and dividends, the original $2,500 is now $25,000 after 20 years. 

I was planning on using taxable accounts to pay for my daughter's college, but she is only in 8th grade right now so am wondering if my lazy investor strategy is wrong and perhaps I should pay a bit more attention. 

econberkeley

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Re: Employee Stock Purchase Program
« Reply #42 on: July 15, 2014, 11:15:53 AM »
I get 0% discount on my ESPP. Hr told me it is a great deal since I do not have to pay any brokerage fees:)

ProfWinkie

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Re: Employee Stock Purchase Program
« Reply #43 on: July 15, 2014, 01:36:35 PM »
Watch out for non-competes tied to ESPPs

AJDZee

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Re: Employee Stock Purchase Program
« Reply #44 on: July 16, 2014, 06:51:48 AM »
I get 0% discount on my ESPP. Hr told me it is a great deal since I do not have to pay any brokerage fees:)

BAHAHAHA   sorry, that was cute.   ahhh HR....  :)

sekritdino

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Re: Employee Stock Purchase Program
« Reply #45 on: July 22, 2014, 02:56:13 PM »
Also a Microsoft employee here. The stock vests and you can sell it right after the buy happens. You are getting free money. I contribute the max 15% of my gross income. The stock is doing really well right now too so fingers crossed it keeps going.

Brilliantine

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Re: Employee Stock Purchase Program
« Reply #46 on: October 02, 2015, 12:04:37 PM »
Reviving this topic as it is very specific to the Microsoft ESPP.

Can anyone tell me how to give a "quick sell" order to Fidelity?

msilenus

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Re: Employee Stock Purchase Program
« Reply #47 on: October 02, 2015, 12:50:05 PM »
You mean an order that pre-emptively says "sell as soon as the shares hit the account at the current market price?"  I do not believe that such an option exists.  Best you can do is sell at first opportunity.