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I've attempted to search for answers to this, but I'm just not understanding them, so wanted to post to see if I can get some clarity.

I am part of a ESPP which has a 6 month lookback, 15% discount, and no blackout periods for sales.

According to the plan documents (a "Tax Consequences" guide):

In order to qualify for special ESPP tax treatment, stock acquired through the ESPP must be held until the later of (i) two years after the offering (grant) date and (ii) one year after the exercise (purchase) date. A sale of stock that has satisfied this required holding period is often referred to as a qualifying disposition.

Anything not meeting those requirements is thusly a disqualifying disposition.

My question is as follows: What is the difference, from a tax perspective, of selling shares that are a qualifying disposition vs. shares that are long-term disqualifying dispositions?

Please let me know if I left out any information that would be necessary or helpful to answering this, or if this is a duplicate that I was unable to find the original question from.


I find it useful to have an example for learning, so providing a framework for an example below.

Pretend Example:

  • Income in 22% tax bracket
  • Company stock is GGG.
  • ESPP period is from 2019-07-01 through 2019-12-31.
  • Period Start Price is $80/Share
  • Period End Price is $100/Share
  • Amount Put into ESPP is $1000 during period

Thus, the purchased shares were:

$1000 / (MIN($80,$100) * 0.85) = 14.706 Shares

(14.706 Shares * $100/Share) - $1000 = $470.59 Unrealized Gains
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For simplicity let's consider a single share that you sell for $120, 5 years from now. This is qualifying disposition, but assume for a minute it was not. In that case, you'd owe regular income tax on the discount of $32 ($100 - $80 x 85%), and long-term capital gains tax on the remaining $20 ($120 - $100). But since it is a qualifying disposition, more of the discount is considered as a capital gain. You'd owe regular income tax on a discount of $12 ($80 - $80 x 85%), and long-term capital gains tax on the remaining $40 ($120 - $80). Since more of the gain is considered long-term capital gains, you'll pay less is taxes overall, and this is often true for qualifying dispositions. However, depending on where the share price is on the 3 key dates (grant, purchase, and sale), there are cases where a disqualifying disposition can actually be more favorable.

  • So the difference is that in a qualifying distribution you pay regular income tax on: Grant Price - Discount Price and capital on Sale - Grant whereas on disqualifying distributions you pay regular income on Exercise Price - Discount Price and capital on Sale - Exercise? – ALurker Dec 31 '19 at 20:27
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    @ALurker In this case yes, although in general it's more complicated. bayalisistheanswer.com/espp-taxation-qualifying-disqualifying goes through all the details. – Craig W Dec 31 '19 at 20:52

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