Video included! For how long must I hold shares purchased under a Section 423 ESPP to receive favorable tax treatment?
To get favorable long-term capital gains treatment, you have to hold the shares purchased under a Section 423 ESPP for more than one year from the purchase date and more than two years from the grant (or enrollment) date. The timeline below illustrates the concept of the holding period, showing how long you must keep the shares to prevent a disqualifying disposition and make a qualifying disposition at sale.
However, even if you hold the stock long enough, not all of the gain over your purchase price will be capital gain. You will still recognize some ordinary income at sale. (For the tax rules and some examples, see related FAQs on ESPP stock held long-term and ESPP stock sold early.) Nevertheless, holding the shares long enough can result in less ordinary income and more capital gains, which means you'll pay less in taxes.
Example: Your company offers a 15% discount with a lookback.
- Market price: $50 at the start of the offering and $55 on the purchase date.
- Purchase price: $42.50 (85% of $50).
|Holding period||Sale price||Tax treatment|
|Less than one year||$60 per share||$12.50 ordinary income +
$5 short-term gain
|More than one year from purchase and two years from start date||$60 per share||$7.50 ordinary income +
$10 long-term gain
On your IRS Form 1040 tax return, you report capital gains on Form 8949 and Schedule D. For details, see the Tax Center for annotated examples of reporting sales of ESPP stock, and also another FAQ on big mistakes to avoid with ESPP tax-return reporting.
Got another minute? Watch our quick take on the top five things you need to know about ESPP taxes.