How do ESPPs work?
March 3, 2003
Subject: ESPP Plans
Date: Tue, 14 Jan 2003
I have read many of the articles on your website and find the information to be outstanding. I have a clarification question/example on ESPP plans and the taxation upon sale. Here is the scenario:
January 1, 2002 price: $10/share
July 1, 2002 price: $20/share
Exercise price on July 1: $8.50/share
Future sale price: $30/share
- These shares must be held to January 1, 2004 to qualify for long-term gain treatment, avoiding a disqualifying disposition.
- If the holding period is met, there will be $1.50/share of ordinary income and $20/share of long-term capital gains.
- If the holding period is not met resulting in a disqualifying disposition, there will be $21.50/share of ordinary income with no capital gains.
Date: 17 Feb 2003
- No. The ordinary income is the excess of the fair market value on the date of exercise over the option price, or $20 – $8.50 = $11.50. There would be a capital gain for the excess $30 – $20 = $10.