Here are the details of my company's Employee Stock Purchase Plan:

  • An automatic 5% purchase discount off the fair market value of the stock.
  • Payroll deductions start on July 1st.
  • The stock purchase occurs on December 31st.

I don't like holding single stocks, so I was planning on selling the stock right away for an automatic 5% profit. However, I do the math, and come up with the following:

  • Because of a 25% short-term capital gain tax, that 5% profit becomes a 3.75% profit (25% tax on 5%).
  • Because of the purchase period, all that money I put in (starting July 1st) will take 6 months (until December 31st) to return the 3.75% profit (which is when the purchase and immediate sale happens), resulting in about a 7.5% annual return (3.75% * 2).

On the other side of the spectrum, I have a student loan with an 8% annual interest rate I'm paying off as fast as possible.

Wouldn't putting all of this money towards repaying the student loan instead result in a slightly higher return (through interest rate savings) with none of the hassle?

What am I missing?

  • 1
    You say payroll deductions start July 1st. Does this mean that there are more deductions in later months? For instance under the above analysis the July deduction doesn't make since but an October deduction definitely does.
    – rhaskett
    Commented Jun 1, 2015 at 20:35
  • @rhaskett Yes, you can make deductions (up to 20% of your paycheck) every pay period starting July 1st. Now that I think about it, I see where you're coming from. The closer to December 31st the contribution is, the higher the percentage of return when converted to annual returns. The annual return starts being higher than 8% in August, where the annual return for that contribution would be 9% (12 / 5 * 3.75 = 9). September -> 11.25%, October -> 15%, November -> 22.5% and December -> 45%.
    – user19035
    Commented Jun 1, 2015 at 20:50
  • @rhaskett Did I get that math right?
    – user19035
    Commented Jun 1, 2015 at 21:01
  • My knowledge of short-term capital gain taxation is too low to know how it applies here. Otherwise the only other consideration I can think of that might be missing is if your companies stock has a particularly high bid/ask spread that might eat away at that 5% profit.
    – rhaskett
    Commented Jun 1, 2015 at 22:39
  • 1
    Indeed, the average holding time is closer to 3 months. And the return is 100/95 or 5.26% Commented Jun 2, 2015 at 0:09

3 Answers 3


The closer the contribution is to the December 31st date, the more profitable that specific contribution is, only taking into consideration the 5% discount. On your case, the first contribution that beats your student loans interest rate is the August one, where you get about 9% annual return, the remaining contributions go up from there.


It's 5% free money, if you believe the company's stock is fairly valued and likely to grow and/or return reasonable dividends until you're ready to sell it. There's usually a minimum holding period of a few months to a year before these discounted shares can be sold; take that into account

  • (Having said that, I dropped out of my own ESPP because it used a formula that, while a bit more generous than a straight 5%, made calculating taxes a pain in the patootie, and at the time their stayements didn't help much. And I preer not to deal in individual stocks, even our own. So for me, the hassle factor outweightd the additional income. Maybe shortsighted but that's what it came down to.
    – keshlam
    Commented Oct 30, 2015 at 13:00

In many ESPP programs (i.e. every one I've had the opportunity to be a part of in my career), your purchase is at a discount from the lower of the stock prices at the start and end of the period. So a before-tax 5% return is the minimum you should expect; if the price of the stock appreciates between July 1 and December 31, you benefit from that gain as well.

More concretely: Stock closes at $10/share on July 1, and $11/share on December 31. The plan buys for you at $9.50/share. If you sell immediately, you clear $1.50/share in profit, or a nearly 16% pre-tax gain.

If the price declines instead of increases, though, you still see that 5% guaranteed profit. Combine that with the fact that you're contributing every paycheck, not all at once at the start, and your implied annual rate of return starts to look pretty good. So if it was me, I'd pay the minimum on the student loan and put the excess into the ESPP.

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