How to calculate tax liability for stock purchased through ESPP and then sold?

Question

I'm going to be receiving some stock that I purchased through my Employee Stock Purchase Plan (ESPP) soon and I'm wondering how I would go about determining how much I would owe for taxes if I sold all the stock I get. Below is what I believe to be the relevant information but please let me know if I've left anything out:

Initial stock price: $32
My discount: 10%
Money I have contributed to the ESPP post tax: $10,000
Current stock price: $55

Based on my calculations I should receive about 346 shares. If I sell these as soon as I get them for $55/share it comes to $19,030. How do I determine what I would owe for taxes on that?

Answer 1

There are two things at work here.

Let's assume you are buying 300 shares for $32*300=$9600 at a time when the fair market value is $55. At this point you realize a gain of ($55-$32)*300 = $6900. As long you as don't sell anything, there are no taxes due.

If you sell the stock right away and cash the $6900 you need to pay regular income tax on this. How much tax that is depends on your tax bracket and your incremental tax rate.

Now let's assume you hold the stock more than one year and it goes up to $70. When you sell it at $70 you will have to pay regular income taxes on your initial gain of $6900. However the additional gain of ($70-$55)*300 = $4500 will be taxed as long term capital gain for which the tax rate is typically lower.

Holding it for more than a day and less than a year you may owe short term capital gains which in some states (Massachusetts for example) is a bad idea.

Caveat: Taxes are complicated and depend on a lot of specifics and fine print. Consider consulting a professional tax adviser.