Tax Implications of Employee Stock Purchase Plans (ESPP)

Employee Stock Purchase Plan (ESPP) Tax Rules

What Is an ESPP?

An ESPP allows employees to purchase company stock at a discount (usually 5–15% off market price) through payroll deductions.

Qualifying vs. Non-Qualifying ESPPs

Qualifying ESPP (Section 423 Plan)

• Most common type
• Discount up to 15%
• Holding period requirement for favorable treatment

Non-Qualifying ESPP

• Entire discount is ordinary income at purchase
• Simpler tax treatment

Qualifying ESPP: Two Types of Dispositions

Qualifying Disposition (Held Long Enough)

Held:

• More than 2 years from offering date
• More than 1 year from purchase date

Tax treatment:

• Ordinary income = lesser of: actual gain or discount at offering date
• Remaining gain = long-term capital gain

Disqualifying Disposition (Sold Too Soon)

• Ordinary income = discount at purchase (price difference)
• Remaining gain or loss = short-term or long-term capital gain/loss

W-2 Reporting

For disqualifying dispositions, your employer reports the ordinary income portion on your W-2. Your brokerage may report incorrect basis — you must adjust.

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Have ESPP shares? ESPP reporting is one of the most commonly mishandled areas of personal taxation.