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Taxation of Employee Stock Purchase Plans, Part 2 - Ep 38

This week's episode of the Equity Compensation Guidebook is going to be super short. We're going to continue the conversation about taxation of employee stock purchase plans. I could try to make this episode much longer by reviewing what exactly is an ESPP. However, I'm not that guy, just go back and listen to the previous episode #37. That episode covers the basics of employee stock purchase plans as well as the introduction of taxes and disqualifying dispositions (still one of my favorite terms). There are two main items to know with taxation of ESPPs and we will cover them both in this episode so check it out. 

You will want to hear this episode if you are interested in...

  • What to know if you have a non-qualified ESPP [1:07]
  • What to know if your ESPP is a qualified plan [1:41]
  • This week’s FLASHBACK [6:02] 

What you need to know about taxation of non-qualified ESPPs

Pretty much nothing. 

Seriously, it’s very straightforward. Company stock purchased through a non-qualified ESPP is just like buying it through the stock market. That's it. The only thing you have to know is that if there is a discount it will be reflected on a W-2 when that W-2 is issued by your employer and the discount is treated as compensation income.

What if my ESPP is a qualified plan?

This is the more common form of employee stock purchase plans. Qualified plans simply mean they follow certain IRS rules and therefore have favorable tax treatments. The tax treatment of a sale depends on how long you hold the shares. The holding period requirement is met on the later of the following two dates. The date two years after the company granted the option and the date one year after you received or purchased the stock. If you dispose of shares before meeting the holding period requirements, you've done what's called a disqualifying disposition. Basically, you lose some or all the tax benefits of a qualified employee stock purchase plan. Obviously, if you meet the holding period requirements, you then can have what is called a qualifying disposition. Check out the episode for a little more in-depth explanation and some examples. 

This week’s FLASHBACK: Worst class in high school

Outside of my M.A.S.H. tv series education, I do NOT have a scientific brain. I barely made it through high school chemistry. If it wasn’t for the honors chem class getting canceled because there was no teacher with the skill set to teach it I may have failed the class. Lucky for me when that class was canceled the 2 smartest students in our school became my lab partners. Un-lucky for the teacher, there were a host of students in class who knew more about science than he did. 

In almost every class a student would interrupt and correct something the teacher taught. It wasn't anything malicious, just students asking if he was correct. Fortunately— or maybe, unfortunately— it made students pay more attention as they were trying to find an error. This was partly because a buddy of mine decided to track how many errors the teacher made throughout the year. He tallied 499 errors and this was after starting a few weeks into the school year. Talk about know-it-all teenagers! 

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