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I participate in my company's ESPP. Unlike most ESPPs, ours purchases shares on a MONTHLY basis, the price being the average on the last day of the month. A dollar contribution is taken out of each paycheck (semi-monthly) and used for these monthly ESPP purchases.

I've read a few articles discussing whether it's more favorable to hold the stock over a year to get the Cap gains tax rate, or instead, sell and take the 17.6% profit immediately. However, most of these articles address ESPPs that purchase stock every 6 months and price it based on the lower of either the offer date or the exercise date.

How would the math work in my situation? I've been holding the stock and the company has been performing really well, so I'm making substantial gains on the stock I purchased earlier... obviously less in more recent months since I'm buying in at the higher price. Overall it has been quite profitable so far, but I'm not sure the company can keep up the same rate of growth long term (that being said, I don't see it dropping substantially either).

Am I better off forgetting about taxes and just taking my profit every month right away or should I hold the stock and maybe sell off portions of it at different times at the cap gains rate?

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A general rule of thumb is to avoid having more than 5% of your investments in any single stock, to avoid excessive risk; it's usually even more risky if you're talking company stock because an adverse event could result in an inferior stock price and you getting laid off. Under other circumstances, the ideal amount of company stock is probably 0%. But there are tax benefits to waiting, as you've noted, and if you're reasonably confident that the stock isn't likely to jerk around too much, and you have a high risk tolerance (i.e. lots of extra savings besides this), and you're comfortable shouldering the risk of losing some money, it might make sense to hold onto the stock for a year - but never any longer.

The real risk to holding a lot of company stock doesn't depend on how often you buy it and sell it per se, but having period purchases every month should make it easier for you to ladder the funds, and regularly sell your old shares as you purchase new shares.

You might also consider a stop-loss order on the stock at or near the price you purchased it at. If the stock is at $100, then you buy at $85, and then the stock drops to $85, there are no more outstanding tax benefits and it makes no sense to have it as part of your portfolio instead of any other speculative instrument - you probably get better diversification benefits with any other speculative instrument, so your risk-adjusted returns would be higher.

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  • With monthly purchases one has to be aware of the wash sale rules.
    – littleadv
    Nov 10, 2012 at 3:40
  • Wash sale rules are another good reason to immediately dispose of all ESPP shares.
    – stannius
    Aug 11, 2015 at 20:32
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For ESPP, the discount that you get is taxed as ordinary income. Capital gains is taxed at the appropriate rate, which is different based on how long you hold it.

So, yes, if the stock is going up,

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  • "For ESPP, the discount that you get is taxed as ordinary income." -> I don't think this is always true.
    – Franck Dernoncourt
    Dec 21, 2017 at 5:10
  • E.g. from en.wikipedia.org/w/… "Depending on when the employee sells the shares, the disposition will be classified as either qualified or not qualified. If the position is sold two years after the offering date and at least one year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years of the offering date or within one year after the purchase date the disposition will not be qualified. These positions will have different tax implications.".
    – Franck Dernoncourt
    Dec 21, 2017 at 5:10

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