1

My company offers employee stock purchase plan at a 15% discount. What I am wondering is how does capital gains come into effect if I only sell my original investment? As an example, using even numbers for easier math:

Lets say at the end of the holding period I have put in a total of $1000.00. The company stock is flat over the period (for simplicity), and worth $10.00 a share. So the discounted price is $8.50.

So my $1000 dollars is now worth (1000/8.50)*(10.00) = $1176 and is all in company stock. What happens if I only sell $1000.00 worth of it, leaving $176 as company stock. Do I have to pay taxes/capital gains on the $1000 I cashed out?

Edit: I am in the United States

3

I'm assuming you have a qualified employee stock purchase plan (ESPP) and sell immediately after receiving the shares, which means you have what's called a disqualifying disposition. Selling only $1000 worth actually complicates things, so let's instead first assume you sell all shares. What should happen is the W-2 from your employer will report the discount of $176, which will be taxed like regular income. If it doesn't, you need to add it as miscellaneous income to your tax return (but not subject to self-employment tax). You will receive a 1099-B from your brokerage showing your proceeds of ~$1176 minus fees. The cost basis should be reported as $1176, although often it will show as $1000, in which case you need to manually adjust it to avoid being double-taxed. So overall, you will have a small short-term capital gain or loss (taxed at regular income rates), then the discount which is also taxed like regular income.

If you instead only sell $1000 worth (100 shares instead of all ~117), your discount, proceeds, and cost basis will all be proportionally less. Again, since you're selling immediately, the main effect is you only pay regular income tax on the discount, in this case ~$150 instead of the full $176.

If you were to hold on to the shares for longer before selling, you could get long-term capital gains tax rates, and longer still you could get a qualifying disposition, which potentially have more favorable tax treatment. It's complicated so I won't go into the details, but you can find them elsewhere. However, it's often advised to sell ESPP shares immediately and treat the discount as a cash bonus, since your income is already somewhat tied to your employer's performance.

  • 1
    That makes sense. What I was hoping to do was get my "free 15%" and only remove my original investment, but I guess with the ESPP and the way it is structured/designed thats not possible. – user2840470 Jun 22 at 22:29
-2

This answer relates to the generic concept of capital gain and is not intended to be financial advice, and certainly not advice relevant to any particular jurisdiction.

Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. - Investopedia

The key term is "until the asset is sold".

So you consider what you've sold, in this case, $1000 worth of stock, and take away what you bought it for. By the terms in your question, you bought it for 85% of what you sold it for, i.e. $850. So your capital gain is by definition $150.

The rest of the stock you bought wasn't sold, so there's no capital gain (or at least, no realized capital gain) on that portion.

  • That makes sense, thanks! – user2840470 Jun 22 at 15:20
  • @user2840470 You're welcome. – Lawrence Jun 22 at 15:21
  • 2
    For an ESPP this is overly simplified. – Craig W Jun 22 at 15:28

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.