An Employee Stock Purchase Plan (ESPP) allows employees to purchase company stock at a discount, typically up to 15% off the market price. With proper planning, ESPPs can provide significant returns with minimal risk.

Key ESPP Features

• Discount: Usually 5-15% off market price
• Lookback: Purchase at lower of grant or purchase date price
• Offering Period: Typically 3-6 months
• Contribution Limits: $25,000 per year (based on FMV)
• Payroll Deductions: After-tax contributions from salary

Tax Treatment

Disqualifying Disposition

Selling within 2 years of grant or 1 year of purchase:

• Bargain element (discount) taxed as ordinary income
• Additional gain/loss taxed as capital gain/loss
• Employer gets tax deduction

Qualifying Disposition

Holding 2+ years from grant AND 1+ year from purchase:

• Ordinary income limited to actual gain or discount at grant
• Remaining gain taxed as long-term capital gain
• Can be beneficial with lookback provision

Maximizing ESPP Value

• Always Participate: Even selling immediately provides guaranteed return
• Max Contribution: Take full advantage of the discount
• Understand Your Plan: Know lookback provisions and limits
• Tax Planning: Consider overall tax situation
• Diversification: Don't hold too much employer stock
• Track Basis: Keep detailed records for tax reporting

Risk Considerations

• Concentration risk in employer stock
• Market volatility between purchase and sale
• Job loss could force unfavorable sale timing
• Complex tax reporting requirements
• Opportunity cost of locked-up capital