(Typically) Sell ESPP Shares Upon Purchase

In the majority of ESPP shares purchases, there are minimal or no tax benefits to be gained by holding shares, and selling the shares immediately is likely the best path to pursue

Strategy Overview

Some shares purchased through an ESPP program have the potential for beneficial tax treatment if you hold the shares for a longer period of time, but in most cases that tax benefit is not worth pursuing relative to the concentration risk that you accept by keeping the shares.

Tax Details

ESPP taxation is somewhat complex, with the tax treatment of shares purchased through an ESPP program depending on multiple factors.

Is the ESPP a Qualified or Non-Qualified Plan?

ESPP plans can be two types: qualified or non-qualified. Non-qualified plans do not offer the potential for any additional tax benefits, so to reduce concentration risk we recommend to clients that they sell the shares immediately. If the plan is a qualified ESPP plan (~80% of ESPP programs are), some potential tax benefits may exist in certain circumstances, and should be evaluated alongside your other company stock-comp, financial plan, and risk profile.

If You Have a Qualified ESPP, What Are the Terms and How Did the Stock Perform?

Qualified ESPPs have two potential benefits for participating employees: (1) a lookback provision, and/or (2) a discounted purchase price. How these benefits are taxed depends on a number of factors, including which (or both) of the lookback/discount benefits the plan has, how the stock performed during the offering period, what price the stock is eventually sold at, and when it is sold.

More details are provided in ESPP taxation, but the most persuasive tax item is if you hold shares purchased through a qualified ESPP program that had a lookback provision until they achieve a qualifying disposition. In that casee, the gains from a lookback provision would be taxed as long-term capital gains instead or ordinary income. Strategically, at 30-40 Wealth we've found that given the concentration risk tech workers already have to their company stock (via any owned stock, and existing stock grants), pursuing this tax benefit only tends to be worth considering if the stock price increased materially during the offering period (and the ESPP had a lookback provision)

Key Benefits

• Immediately capture the benefit from the discount. ESPP's with a discount provision are very near "free money" if you sell the shares immediately upon purchase.

• Reduce concentration risk. As a tech worker, you already have significant concentration risk exposure to your company via (1) any vested options/stock (if applicable), and (2) unvested stock-comp grants. Selling ESPP shares immediately ensures you don't increase that concentration risk further.

Key Considerations/Flags

• Tax benefits of a qualifying disposition. As noted in the flow chart above, if the shares have a lookback provision and the shares increased (perhaps significantly) during the offering period, you should weigh the tax benefits of holding the shares to achieve a qualifying disposition against the incremental concentration risk you will take on.

Strategy: When to Consider This and When to Avoid It

​🟢When to Consider This Strategy:

• If your ESPP is a non-qualified plan. There is no tax benefit to holding shares of a company after purchase if the plan is non-qualified.

• If your ESPP is a qualified plan, but (1) does not have a lookback, or (2) the stock was down or flat during the offering period. The lookback (if applicable) did not provide any benefit during this offering period. As such, there are minimal tax benefits to be achieved by holding (just deferred recognition of the income) versus selling immediately.

🟡 Consider on a Case by Case Basis:

• If your ESPP is a qualified plan, and has a lookback, and the stock price increased (perhaps substantially) during the offering period. You should weigh the tax benefits of holding the shares to achieve a qualifying disposition against the incremental concentration risk you will take on.

Example

For examples see ESPP Taxation/Qualified ESPP Plan Taxation Examples