Employee Stock Purchase Plan

• Under the employee stock purchase plan (ESPP), employees buy stock in their companies at a discount of up to 15 percent using after-tax dollars, so no tax is due upon purchase. When selling it, the discount received falls under the category of compensation and is taxed as regular income. Any gains over and above the amount paid (the market price at the time of purchase) is taxed as either income or capital gains.
  
  

Qualifying Disposition

• A qualifying disposition is achieved when employees wait at least 12 months to sell after obtaining the actual stock and two years after receiving either the initial option under an incentive stock option (ISO) plan or the start of the offering period for the employee stock purchase plan (ESPP). The lower capital gains tax then applies on the difference between the exercise price and market price at the time of sale.
  
  

Disqualifying Disposition

• All transactions that fall within the one- and two-year time frames for ownership and initial grants count as disqualifying dispositions, and the discounts received do not qualify for the favorable capital gains tax treatment. They are generally treated as regular income, which companies report on Form W-2. Any additional profits are then treated as short- or long-term capital gains, to be reported on Form 1040, Schedule D.
  
  

The Company's Perspective

• Some companies offer an employee stock ownership plan (ESOP), in which they deposit shares of their own stock, or cash to buy it, into a trust fund. They can also borrow the amount needed to buy the shares, and repay the loan with cash contributions. Contributions to the fund are tax deductible, including both principal and interest when the money is borrowed.