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The front page of today's San Jose Mercury News has an article saying that the IRS has decided that the bonus element of employee stock purchase plans is immediately taxable, and that employers should withhold taxes on the income that the discounted price represents. This is a change in existing practice which has only considered that the tax is due when the shares are sold.

The full article is here:

One item in the article caught my eye. They said that "If the stock is held long enough, however, it qualifies for long-term capital gains treatment and is taxed at a maximum rate of 20 percent."

I used to just sell and take the money (and thus pay the taxes), but I've held onto the stock from the last few plans.

1) Will this new IRS behaviour mean that I'm going to owe a bunch of taxes based on my nominal gain for the shares that I've held onto?

2) Is the article right about the discounted amount eventually being taxed as capital gains? How long does that take (the company literature just says that if I sell within 18 months I must tell them, and they will report the money on my W-2)?

-Tony Luck
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