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Author: jeepie91 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121564  
Subject: Another ESPP Basis Question Date: 12/13/2005 1:05 PM
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Hello I need some help, I started participating in my company ESPP back in 1989 with the intent to use whatever accumulated for retirement. I have not been putting a lot of money in but over the years it has built up, now I am questioning the wisdom of having this money in the same company I work for. I would like to sell some to fund my Roth IRA maybe each year as a way to reduce the stock and allow me to control it better in the Roth.
I have been trying to find and example of how to calculate the basis, but I have not been able to find one that includes, twice a month purchases (which means fractional share are purchased), there is also a % discount when purchased, and the dividends are being reinvested. As a side note I never sold any stock so this will be a learning experience for me.
Does anyone have an example calculation, or can anyone point me to a website that explains this ?
I would like to get a handle on what the result of selling some of these shares will be.
Thanks for the help.

From what I have been able to dig up so far I think I may need an EASY button to do this.
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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81924 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/13/2005 1:18 PM
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Try getting your company ESPP administrator to print you out a history of your account. If they can [will] then it will have;

Date purchased - Shares purchased - Price.

There are a few ways to determine the cost basis and the best way is found by knowing if you had gains, losses and how much you are going to sell.

For an example of the methods;
http://www.fool.com/taxes/2001/taxes011005.htm


Enjoy the math, and thank a teacher!

DrTarr

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81925 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/13/2005 1:26 PM
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Hello I need some help, I started participating in my company ESPP back in 1989 with the intent to use whatever accumulated for retirement. I have not been putting a lot of money in but over the years it has built up, now I am questioning the wisdom of having this money in the same company I work for. I would like to sell some to fund my Roth IRA maybe each year as a way to reduce the stock and allow me to control it better in the Roth.
I have been trying to find and example of how to calculate the basis, but I have not been able to find one that includes, twice a month purchases (which means fractional share are purchased), there is also a % discount when purchased, and the dividends are being reinvested. As a side note I never sold any stock so this will be a learning experience for me.
Does anyone have an example calculation, or can anyone point me to a website that explains this ?
I would like to get a handle on what the result of selling some of these shares will be.


This is very simple, but with lots of pieces. Your cost basis is exactly what you paid for the stock. Each purchase via payroll deduction creates a block of shares (may be fractional) with a cost basis. Each dividend reinvestment creates an additional block of shares (will almost certainly be fractional) with a cost basis. You will need to retrieve all of your ESPP statements in order to proceed. If you don't have them, contact your plan administrator for assistance.

Your cost basis on any specific sale is the cost basis assigned to that block(s) of shares. Unless you notify the ESPP administrator that you want to sell specific shares, you are deemed to have sold the first shares first continuing through the blocks until you accumulate the appropriate number of shares. You will probably have to prorate the cost basis of the last block of shares in the sale, since you will only be selling part of that block.

Keep asking questions if any of this is unclear.

Ira


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81926 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/13/2005 1:30 PM
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There are a few ways to determine the cost basis and the best way is found by knowing if you had gains, losses and how much you are going to sell.

For an example of the methods;
http://www.fool.com/taxes/2001/taxes011005.htm


No, there is only one way to determine the cost basis... the actual price paid for the shares sold. There are two options, whether to specify which shares are sold or to take the default first in, first out ordering of shares. This isn't a mutual fund, so average cost basis methods don't apply.

Ira


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Author: jeepie91 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81928 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/13/2005 3:45 PM
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I believe I have all the statements, I will have to double check I have them all. I took a look at some of them and I think this is a little more complicated than I first thought. It looks like the company was putting money toward shares of stock based on your years of service, but they decided that they would stop that and distribute what they had, So I recieve two shares in certiicate form (which I hope are in our safe deposit box at the bank)in 1988. It looks like I started dividend reinvestment in 1991. So the first several statements are purchases of 0.019, 0.024 shares ect, I didn't start having money taken out of my check until mid 1992. To make things worse there have been two stock splits from then to now.
I guess the first step would be to find the certificates and send them to the plan administrator so I can sell them when I am ready, sound like the correct way to start ?
Thanks again.

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Author: fleg9bo Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81929 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/13/2005 3:56 PM
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I guess the first step would be to find the certificates and send them to the plan administrator so I can sell them when I am ready, sound like the correct way to start ?

We recently ran into the problem of not having the statements for every time period in which we bought ESPP stock. DW contacted the plan administrator and soon had a summary that showed each purchase, date, price, etc., which included enough info for us to do the necessary calculations.

--fleg

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81936 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/14/2005 12:06 AM
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If you're looking for easy, let's try to do that.

As others have stated, the first thing you need is all of your account statements from the beginning of time. It sounds like you're pretty close on that. Hopefully, your administrator will be able to fill in any holes in your records.

Now list things out by date. The info you need is: date purchased, purchase price, and number of shares. That's all the information that is relevant. Don't worry about your cost per share or your payroll deductions. Each quarter, you'll have a stock purchase for that quarter's ESPP deductions. Periodically, you'll also have dividend reinvestments. For this purpose, those are just another purchase of stock. For any transactions before the stock split, adjust the number of shares to reflect the post-split situation.

Now when you sell, start with the oldest purchase. Add up the number of shares and purchase prices until you get to the number of shares you sold. You'll need to split the last purchase into two pieces to get to the right number of shares.

The total you obtain is your cost basis for the shares sold. Mark those blocks of shares off your list as being sold. The next time you sell, pick up where you left off last time - with the other portion of the purchase you split into two pieces. Then go back to adding things up to get to the number of shares you sold this time.

Once you do a couple of these, you'll find it isn't that hard at all.

One thing you should know is that I've described what tax pros will call the FIFO method for deciding which shares you sold. It is the default method in the tax code. As an alternative, you would need to take your list (yes - you still need to do that part) and tell your broker exactly which shares to sell. They need to confirm your order in writing. Then you would treat those specific shares as the ones being sold. The advantage here is that you can specify any shares you choose to get the result you want. (As long as that result is available to you, of course.) So if you wanted to minimize your gain, you would specify the shares with the highest cost. If you needed the transaction to be short term, you could specify the shares purchased in the last year. If you paid more for some shares than the current value, you could specify those shares to get a tax loss.

As you can see, this is a bit more complicated than just using the oldest shares. But not all that much more complicated. The hardest part for you will be to list out all of your purchases over time. With that list in place, calculating your cost basis will be fairly simple, no matter which way you choose to calculate your cost.

--Peter

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81939 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/14/2005 12:48 AM
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Sorry,
Posted wrong link. Thanks for the catch ira, in a hurry, again sorry

Meant that there are different ways to determine a cost basis (FIFO, Specific) for the number of shares you want to sell. After your plan administrator gives you the

Date purchased - Shares purchased - Price.

That is your cost basis for each of those shares. But the aggregate "cost basis" you can use for the number of shares you want to sell is determined either FIFO basis or Specific basis.

The best way to determine which method to use is found by knowing if you had gains, losses and how much you are going to sell - but it is usually the specific method (depending on holding period) to maximize any tax deferral.



DrTarr



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Author: jeepie91 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81941 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/14/2005 9:49 AM
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Thank you for the help, let me gather what I need and start to take a look and see if I can follow what you are saying. I probably will have more questions once I start to dig in.
Thanks again.


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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81942 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/14/2005 10:03 AM
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One part of the original question that hasn't been discussed yet is how does the discount get factored in? many ESPP plans give you a 5 - 15% discount off of the prevailing market price when the shares are purchased.

During the quarterly window, most ESPP's will sell you shares at the lesser of the price less the discount at the beginning of the current period (say, Jan 1) or the price on the date of purchase less the discount (say for payroll period of Mar 15). At least at my company, the ESPP period occurs in 6mo windows.

Now, my understanding of how such a plan works is if you sell or otherwise dispose of your shares during a 'disqualifying period' then the amount of the discount needs to be treated as miscellaneous income and if sold directly by your plan you'll get a 1099-misc from them. If however you hold the shares for a period of 2 years before selling them then when sold you do not have to treat the discount portion as income. The is my understanding of the plan as was described to me...doing my own due diligence though (trying to read the irs docs on this) it seemed to me that you had to treat the discount as income whether or not it was held for the 2 yr period.

Can any of our kindly experts here confirm the correct way to handle the discount? (ie, if sold after holding for 2 year period, no tax on the discount...or there is tax?)

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Author: ssk0 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 82302 of 121564
Subject: Re: Another ESPP Basis Question Date: 12/29/2005 11:58 AM
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I am not an expert on this but I spent a whole bunch of time this week understanding how this works in preparation for selling my shares next year as my employer is getting sold for cash. Here is what I learn.

This is the best resource I found on handling sale of ESPP shares:
http://fairmark.com/execcomp/espp/index.htm

A very high level summary:

Basis is what you paid for the shares.
When you sell, it's considered a 'qualifying' or disqualifying' disposition each of which has a different tax treatment. Qualifying disposition means: you have held the stock for atleast 1 yr after purchase PLUS atleast 2 years after start of the offer period. e.g. If your plan made payroll deductions from Apr 1st to Jun 30st 2002 and made the discounted stock purchase on Jun 30, 2002, then the offer start date is Apr 1st, 2002. So, it's a qualifying disposition if the stock is sold after Apr 1st, 2004. A sale which is not a qualifying disposition is a disqualifying disposition.

Handling of taxes on sale:

Disqualifying disposition:
You need the following information:
- your basis
- Discount received (i.e. fair market value minus what you paid)
- profit (i.e. sale value minus fair market value at time of purchase)

Your discount is considered regular income
Your gain is treated as a long term capital gain

Note that in this case, if the share price dropped after purchase, then you can have a high regular income plus a capital loss.

Qualifying disposition:
You need the following information:
- Basis (what you paid for the shares)
- Discount (this is calculated as discount off the share price on the offer period start date. i.e. If you get a 15% discount normally off the lowest price at the beginning and end of quarter, then you calculate discount off of the price at the start of the quarter even if the price at the end of the quarter was lower).

- Profit (difference between sale price and basis)

Tax treatment:

- The lower of discount and profit is considered income. i.e. If share price dropped after purchase, you will not have any income.

- Sale amt - (Basis plus income) is considered capital gain.

Disqualifying disposition is more intuitive than qualifying disposition but what I saw from the numbers is that a qualifying disposition tends to lump more of your personal value gain into capital gains vs income thereby reducing taxes.


Hope this helps. Disclaimer: I could be mistaken so please review the above link as well as IRS docs to confirm the above.



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