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Author: aegl One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Roth IRA purchase Date: 7/29/1999 8:21 PM
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My company provides a stock purchase plan. I am able to purchase stock every six months. This is a non-retirement account and has no tax shelter benefits. What are the tax consequences of selling some of this stock and immediately purchasing the same stock but within a Roth IRA ($2000 for me and $2000 for my spouse)?

Most employee stock purchase plans are setup to sell stock at a discount to employees. When you sell the stock you need to know several things to figure out the taxes:

1) The date on which you bought the stock.
2) The price that you paid.
3) The fair-market value of the stock on the day that you bought it. I think that this is usually calculated as the average of the low and high price for that day).
4) The date you sold.
5) The price got for selling.

The amount of the discount you got when you bought is treated as taxable income. Your company will probably ask you to tell them about the sale and throw this amount onto your W-2 so that you can owe lots of taxes on it. However, this will adjust your basis for calculating your capital gains tax.

Example: You buy 100 shares for $20 per share on 5/30/98. That day the FMV is $30.

You sell today for $60 per share with a commision of $20 on the whole sale.

You will owe income tax on 100*(30-20) = $1000 if your tax rate is 28% this will be $280.

Your capital gain is (100 * 60 - $20) - (100 * 30) ... i.e. your sale price (less comission) minus your cost basis (which is based on the FMV, not on what you paid so that you don't have to pay capital gains and income tax on the same money). In this example this comes to $2980 of gain. The holding period is over a year so the gain is taxed at longterm rates (at 20% this will be $596.

The ROTH IRA is a red herring. It doesn't matter what you do with the procedes the tax will be the same.

I have a question open on this board from earlier today as to whether there is a point at which you can hold the stock for long enough to avoid the income tax on the discount that you got.

Your state will probably want some money too, and undoubtably has different rules from the Feds.

-Tony
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