Hi -

I thought I'd just check in with you all and let you know how my ESPP tax preparation is going. I finished up my spreadsheet last night. The hardest part was wrangling with the tax code and understanding the 2 year holding period rule. Basically, I sort the data set by the
"Income Tax Per Share" and "Gain Tax Per Share" columns to determine which lots I should use for a given transaction. I sort to see the most 'Gain Tax Per Share' for charity donations. And I sort to see the least 'Income Tax Per Share' for just plain selling stock and minimizing tax.

This was very confusing for me, because although I understood the tax law and the folks on the board were *extremely* helpful, it was really hard to put together a spreadsheet that was "dynamic" (eg, could be kept current easily w/ new transactions from my ESPP and could give me a snapshot of current tax planning scenarios at a drop of a hat)

If anyone wants to look at my spreadsheet, just let me know how I can post it on the web..

Here's a list of my headings:

Date
Grant Date
Long / Short
ESPP Holding Period Met
Transaction Activity
Lot Number
Shares
Sales Price (SP)
Closing Market Price (MP)
Purchase Price (PP)
Purchase Amount
Transaction Fee
Transaction Status
Transaction Date
SP>PP
SP>MP
MP-PP
SP-PP
Compensation Income
BASIS
Taxable Gain Income (Loss)
Income Tax
Gain Tax
Total Tax
Income Tax Per Share
Gain Tax per Share
Total Tax Per Share

I'm sorry; which two year rule are you referring to?

I don't have the tax code or my tax book handy, but the gist is as follows:

Unless you hold the stock for 2 years past the initial grant date (which is occurs 6 months for me), then no matter what, you have to pay income tax on the market price on the day of purchase less the purchase price, *even* if the sales price is lower than the market price the day you purchased the stock. The only consolation in this case is that since you are paying tax on the difference between Purchase and Market prices, the market price now becomes your stock basis. So if you do sell it at a price lower than the market price the day you bought it, then you can claim a capital loss and get some $ back...

This all assumes that you are getting some discount from your corporation to buy stock at a discount. The IRS figures if your employer is giving you this benefit, you should pay income tax on the benefit.

Anyway, that's the way I understand all this. If it's not clear, let me know and I'll try again. On the other hand, there are some smart cookies on this board, so if it sounds like I have it wrong, please let me know.

Fool On!

I am still confused, I think. I was under the impression that with ESP programs, it was just like buying stock with a basis of whatever you bought it for, usually some discount to the real value of the stock. I know the IRS is thinking about taxing that discount as income, but as far as I know, there are no holding requirements for such stock. If the stock is sold more than a year after purchase, it is a long-term gain; otherwise, it's a short-term gain.

What you're describing sounds like some sort of combination of an ESP program and stock options, but I may just be really confused.

hmmm.... if what you say is true, it definitely makes life easier for me.

you said,

I know the IRS is thinking about taxing that discount as income

everyone i ever talk to tells me that the discount employers give us in an ESPP is taxed as ordinary income. check out some of the responses to my original post.


http://boards.fool.com/Message.asp?mid=15353369

Let me know what you think, ok??

I know the IRS is thinking about taxing that discount as income

As far as I know, the ESPP discount has always been taxed as ordinary income. I believe what the IRS is considering doing is assessing FICA and Medicare taxes on that discount.

Shy

From what I've read, whether that discount is taxed depends on whether the plan is "qualified." If it is, the difference is not treated as income; instead, the discounted price is your basis, so the discount is taxed when the stock is sold.

Unfortunately, the IRS had never definitivly said one way or the other whether ESPP discounts were taxable, and have been fighting in court the right to tax the discounts. One would assume that if they succeed, the basis would become the non-discounted price of the stock, but with the IRS, who knows.

I wasn't aware of the two year holding period, but it does appear that that does exist, at least if you want to have long-term gains.

I should point out that I'm not a tax professional, and can become as confused about such things as anyone else. If someone more qualified could step in here, I'd appreciate it.