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?