ESPP tax oddities when stock price quickly rises after big drop
Job loss: what happens to your ESPP contributions?
Articles and podcast on ESPP basics and financial planning
ESPPs remain popular, according to new study
Self-study courses add more continuing education credits for CFPs and CEPs


Think Twice insider trading prevention videos: educate, entertain, and jolt your employees and executives (see and information below)

Find out why E*TRADE Corporate Services is the stock plan provider of choice for a quarter of the S&P 500 (see and information below)

Annual Executive Compensation & Proxy Disclosure Conferences (see and information below)


Whether you are new to employee stock purchase plans (ESPPs) or have a lot of experience with them, you can find the right level of education and guidance on in our highly popular articles, FAQs, podcast, and self-study course on ESPPs. While has become our trusted brand name, we could just as well be called (in fact, we own the URL!). Below are parts of a few FAQs about ESPPs to introduce our content on the topic.

For those of you attending the annual conference of the National Association of Stock Plan Professionals in San Francisco (November 9–12, 2009), please visit me at our booth in the exhibit hall. Our educational resources are particularly useful when employees and executives are new to ESPPs, when an enrollment or purchase date is about to occur, and during the upcoming tax season.

In addition to giving a talk at the NASPP conference during the Restricted Stock Essentials program, I will be speaking to the Houston chapter of the Financial Planning Association (FPA) on November 2, 2009.

~ Bruce Brumberg, Editor-in-Chief, and the staff of


Below are two frequently asked questions (FAQs) about employee stock purchase plans (ESPPs). They are taken from the 700+ FAQs on, including those in our highly popular Tax Center. All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.

How is my ESPP stock sale taxed when the stock price quickly rises after a big drop or keeps falling?

ESPP taxation can be confusing to begin with, and even more so in a down market and, afterwards, when stock prices quickly rise. When you satisfy the holding-period requirements for tax-qualified ESPPs, you still have ordinary income for the portion of the gain equal to your company's discount (e.g., 5%, 10%, or 15%) from the offering/start price, regardless of the actual purchase price for the stock, and even if there is no lookback.

Ordinary income is this amount or the actual gain at sale, whichever is lower. When stock is sold at a loss, you have no ordinary income, just a capital loss.

However, when you sell the stock early in a disqualifying disposition (sale within one year from acquisition), only the spread at exercise is ordinary income. With this early sale, you will have this ordinary income, even though you have no actual gain because the stock price dropped after purchase.

With a tax-qualified ESPP, the breakdown of ordinary income and capital gains depends on when you sell the stock and its price. This can create tax oddities. It is usually better to have capital gains than ordinary income, as capital gains can be netted against capital losses.

Example: The start-date price is $20. The stock price drops so that the purchase-date price is $10. The 15% discount results in an $8.50 purchase price.

Example with sale when stock price jumps to $15. Hold long enough: have $3 in ordinary income (15% of $20 start price) and $3.50 in capital gain ($15 sale price minus ESPP stock that has $11.50 tax basis). Sell sooner: have $1.50 in ordinary income ($10 market price at purchase minus $8.50 purchase price) and $5 in capital gain ($15 sale price minus ESPP stock with $10 tax basis). In this situation, where the stock price quickly rose after the purchase date, the early sale results in more capital gain income than the sale after one year did.

Example with sale when stock price drops to $5. If you wait to sell the stock until one year after it drops to $5, you will have a $3.50 short-term capital loss and no ordinary income (when the loss is greater than ordinary income, it is all capital loss). If you sell before one year elapses, you will have $1.50 in ordinary income and a $5 short-term capital loss.

For more about ESPPs in down and volatile markets, see a detailed FAQ in the section ESPPs: Advanced. For more on ESPP taxation, see ESPPs: Taxes Advanced.

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If I leave the company, what happens to the money that has been deducted from my paycheck to purchase ESPP shares?

You will continue to own stock purchased for you during your employment, but your eligibility for participation in the plan ends. Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period.

For plans that are tax-qualified under the rules of IRC Section 423, the tax code permits your company to keep the pre-termination payroll deductions to purchase shares when the purchase period ends no more than three months after your termination date (12 months for disability). However, most plans do not permit this, because the ESPP is intended to be a benefit for current employees.

This means that if you terminate your employment before the purchase date, under most plans shares are not purchased for you on a pro rata basis. This applies even if employment ends for reasons other than job loss, such as death, disability, or retirement.

Example: Before you left your company, salary deductions occurred for two months, with a six-month ESPP offering period. The money that you paid is not saved for purchase to the six-month point.

For additional FAQs and articles on what happens to all types of stock grants, including stock options and restricted stock, when you lose your job, see the section Job Events: Termination.

Insider Trading Prevention And Education:
Think Twice Video And Intranet Series
Request free previews at

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For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see Both VHS and DVD formats are available. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.


Fundamentals Of Employee Stock Purchase Plans, by Alisa Baker
Your company's employee stock purchase plan (ESPP) may be one of the best employee benefits in your total compensation package. However, to maximize the value of your ESPP, you need to understand how it works. This four-part series covers all aspects of ESPPs, from the basic to the complex. Part 1 is free to all registered users of the site.

Are You Taking Full Advantage Of Your Company's Employee Stock Purchase Plan?, by Sandra Sussman
Strangely, many employees don't take advantage of their companies' employee stock purchase plans. This article will show you exactly why ESPPs are a good deal.

Employee Stock Purchase Plans & Your Financial Planning, by Bruce Brumberg
ESPPs are popular and prevalent at most public companies. However, the structure of these plans is changing. As this two-part article series shows, these modifications may affect your decision to participate in your ESPP and its place in your financial planning.

ESPP Choices: Flip Or Hold?, by Timothy Farmer and Gregory Geisler
After you decide to participate in your company's ESPP, you must choose whether to sell the stock soon after purchase or to hold it (and for how long). This two-part article series examines different ways to participate in your ESPP according to relative risk tolerance, timeframe, and needs for money.

Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2009, by Lynnette Khalfani with Bruce Brumberg
Tax season will be here before you know it. Read this article if you are puzzled by Form 1099-B or don't know how to report sales of ESPP stock on Schedule D of IRS Form 1040.

Advanced Course On Employee Stock Purchase Plans For CEP & CFP Continuing Education Credit
Certified Equity Professionals and Certified Financial Planners can earn five hours of continuing education credit from this online course of study and exam.

In addition to the articles above, you can stream or download our 10-minute podcast on ESPPs. This lively interview explains how ESPPs work and outlines the basic tax issues. Available free!

Content with the This is premium content symbol requires Premium Membership.

About E*TRADE Corporate Services
With over 25 years of experience, 25% of the S&P relies on E*TRADE Corporate Services for innovative, end-to-end equity compensation solutions that offer ease, choice and the flexibility to adapt to your company's unique needs. The powerful combination of E*TRADE Corporate Services and E*TRADE Securities allows us to provide stock plan administration services from six global service centers for over 1 million participants in more than 160 countries worldwide.


The National Center for Employee Ownership (NCEO) and the Certified Equity Professional Institute (CEPI) recently performed joint research on ESPPs. Their survey, conducted in June and July 2009, includes responses from over 400 companies. Most of the companies viewed the ESPP as a "beneficial" or "excellent" investment for the company. The data provide insight into trends in plan design, participation rates, contribution percentages, W-2 tax reporting, overall satisfaction with the plan, and many other topics.

Some of the many findings include:

  • A meaningful percentage of hourly and salaried employees, managers, and executives participate in their ESPPs. For example, at 30% of the companies the participation percentage among salaried employees was between 30% and 70%. The same pattern was observed among managers at 32% of the companies. At 29% of the companies, the participation rate among executives was between 70% and 100%.
  • 78% of companies with Section 423 plans have a discount of 11%–15% off the stock price.
  • Companies with larger discounts (11%–15%) were 2.5 times more likely to experience increased participation than those with smaller discounts.
  • 55% of companies with Section 423 plans have other limits on purchases in addition to the statutory limit of $25,000 per calendar year.
  • Approximately 53% of the companies with 423 plans had a six-month offering period, and 64% used a lookback to determine the purchase price.

To order the ESPP survey report and obtain access to the data, go to the NCEO website at and present two conferences...

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November 9-10, 2009
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Our growing resource of online courses and exams now offers a total of:

  • 18 hours of continuing education credit for Certified Financial Planners (CFPs)
  • 15 hours of continuing education credit for Certified Equity Professionals (CEPs)

These credits are available from the following courses of study, each followed by its own exam:

This benefit is available only to Premium and Pro Members of To earn the available credits offered by each program, you must score 70% or better on the exam. Think you can ace the test? Visit the Learning Center to get started on a course of study. Then take an exam and show your stuff.

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