How to calculate capital gain & tax for ESPP?

Question

Specific Scenario:

1. Through my company's ESPP, I bought 1000 shares at price $10. At that time, the market price is $20.

2. Now about two years later, I'll sell it for the price of $30 per share.

Questions:

a. did I pay any tax on the $10 gain I made at the time I bought these shares?

b. what is my capital gain now? Is that 1000 x ($30-$10) or 1000 x ($30-$20)?

Thanks in advance!

Answer 1

The answers to your questions are: a. No you did not pay any tax on the $10 gain you made at the time you bought the shares and b. your capital gain will be the $1,000 based on the $10 exercise price.

Caution - Make sure you hold your ESPP shares for the FULL two year period. Internal Revenue Code Section 423 requires that ESPP shares be held more than two years from the date of the grant of the option AND more than one year from the purchase of the shares otherwise your gain becomes ordinary wage income. If held the full period, your gain is capital gain subject only to a maximum 15% capital gains tax.

Caution - Under rules that took effect October 23, 2004 (see page 8 of the attached link), your gain is not subject to social security or medicare withholding AND your employer is not required to withhold income tax. This means that you will report the gain on your tax return, but will not have had the income tax withheld, unless your employer voluntarily does so. In this case, consider increasing your income tax withholding or make an estimated tax payment directly to the IRS and your state.

Answer 2

Let me explain in more detail.

Suppose your ESPP purchase price is $10 which is 15% lower than the granted date price. And the market price on your purchase date is $20. When you sell it, the price is $25. Now there are three cases for your sale of the ESPP stock, supposing you have 1000 shares.

1. If you sell the 1000 share of ESPP in less than a year from the purchase date: your company will take ($20-$10) * 1000 as the normal income to tax. You have to fill out schedule D to report ($25-$20)*1000 as your short term investment gain.

2. Suppose your hold the ESPP stocks from purchase to sale for over one year. But the time from sale back to grant date is less than 2 years. Your company will still use above (1) to report your income tax. And you can enjoy the long term capital gain in schedule D for the amount of ($30-$20)*1000.

3. Now, if you hold ESPP from the granted date to sale date for over 2 years AND from the purchase date to sale date for over 1 year, then your capital gain is so called qualifying gain. Your W-2 will include an extra tax for the amount 15% * 10 * 1000 by your company. But in schedule D, you will still have to pay the long-term tax for the capital gain which is now ($30 - $10 - 15% * 10) * 1000.

If you has a capital loss when you sale your ESPP, the short-term and long-term calculation rules are still apply. But the schedule D will lead to a tax credit instead.

Answer 3

Espp Tax

Answer 4

A.= No
B= Yes for ... 1000 x ($30-$10)...

You used $10,000 of your tax paid money to by 1000 shares.
your basis is $10,000.

You only pay tax when you sell for a gain and you are liable for the tax when you sell.

Sale price = $30,000.

Long term cap. gains (15%) is the tax due on $20,000.
or $3,000.

not too bad congrats...

gl

Answer 5

You get taxed only on the gain. You (or your broker) need to keep track of your own capital gains. You won't get a T4 for them.

Answer 6

Make sure that you are not short for two years holding period. If it is under two years, the scenario is different.
1000*(20-10) will be reported on your W-2 and
1000*(30-20) will go to your Schedule D

Answer 7

No, you didn't pay tax at the time of purchase. Your gain is based on the price your paid ($10.00).