You are not taxed when the shares are purchased: only at sale. The rules for ESPP taxation are more confusing than those for stock options and restricted stock. In general, participants in a Section 423 ESPP (which carries tax advantages) will recognize ordinary income for some or all of the purchase-price discount (e.g. up to 15% of the market price) and will recognize capital gain or loss for the difference between their basis in the stock and the proceeds from any sale. The specific tax consequences to you depend on whether you do or do not satisfy the special holding-period requirements under the Internal Revenue Code, and how the stock price changes between the purchase and your eventual sale.
Example: Assume your company uses a 15% discount on the value of the stock on the first or last day of the offering period, whichever is lower, and that the stock price is $10 per share on the first day of the offering period, $18 on the last day of the offering period (which is your purchase date), and $24 when you sell. When you sell the stock after you satisfy the ESPP holding-period requirement (two years from grant, one year from purchase), you will recognize ordinary income of $1.50 per share (15% of $10). You tax basis is $10 (ordinary income of $1.50 plus your purchase price of $8.50). Your long-term capital gain at sale is $14 per share ($24 minus $10 tax basis).
For more details on the tax rules, with examples and annotated Schedule Ds for tax reporting, see ESPPs: Taxes Advanced. |
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