Q. I participated my company's ESPP, should I sell the stocks right away?
A. Unless you are determined to hold the ESPP stocks for more than a year, the best strategy is to sell right away.
Benefits of ESPP
If your ESPP qualifies for special tax treatment under IRC Section 423, you do not recognize income on the discount (which can be up to 15%) at the time of purchase. Section 423 limits annual purchases to $25,000, based on the stock value at the start of the offering period. Only a small percentage of employees can buy that much, because the plans generally limit purchases to 10% of an employee's compensation.
The most attractive ESPPs have discounts off the purchase price and lookback provisions that base the purchase price discount on the lower of the stock's prices at either the beginning of the offering period (looking back) or the purchase date. If the stock's price increases during this time, the discount can effectively be more than 15%.
Risks of ESPP
Like any stock purchase, holding stock bought through an ESPP entails some risk.
Hold or Sell ESPP Stocks?
Most corporations allow ESPP participants to immediately sell their shares to realize a quick gain equal to the discount, minus any taxes and brokerage commission on the sale.Accumulating stock of a single corporation can create a portfolio that is less diversified than desirable. The rule of thumb is that your company's stock should make up not more than 10% of your portfolio's total assets.
Generally, it's the best strategy to sell the ESPP stocks right away. Because if you hold the ESPP stocks for less than year, any time you sell during this period, your gain at the sale date will be taxed at the ordinary income tax rate instead of at the much lower long-term capital gains rate if you hold the ESPP stocks for more than a year. However, holding the ESPP stocks for more than a year has major risks - what if stock price falls after 12 months?
A. Unless you are determined to hold the ESPP stocks for more than a year, the best strategy is to sell right away.
Benefits of ESPP
If your ESPP qualifies for special tax treatment under IRC Section 423, you do not recognize income on the discount (which can be up to 15%) at the time of purchase. Section 423 limits annual purchases to $25,000, based on the stock value at the start of the offering period. Only a small percentage of employees can buy that much, because the plans generally limit purchases to 10% of an employee's compensation.
The most attractive ESPPs have discounts off the purchase price and lookback provisions that base the purchase price discount on the lower of the stock's prices at either the beginning of the offering period (looking back) or the purchase date. If the stock's price increases during this time, the discount can effectively be more than 15%.
Risks of ESPP
Like any stock purchase, holding stock bought through an ESPP entails some risk.
- As with any stock, the price can fall.
Buying and holding stock reduces available cash, and the funding is deducted from your paycheck.
During the offering period, the deductions accumulated for the purchase do not earn interest.
Hold or Sell ESPP Stocks?
Most corporations allow ESPP participants to immediately sell their shares to realize a quick gain equal to the discount, minus any taxes and brokerage commission on the sale.Accumulating stock of a single corporation can create a portfolio that is less diversified than desirable. The rule of thumb is that your company's stock should make up not more than 10% of your portfolio's total assets.
Generally, it's the best strategy to sell the ESPP stocks right away. Because if you hold the ESPP stocks for less than year, any time you sell during this period, your gain at the sale date will be taxed at the ordinary income tax rate instead of at the much lower long-term capital gains rate if you hold the ESPP stocks for more than a year. However, holding the ESPP stocks for more than a year has major risks - what if stock price falls after 12 months?
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