Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev Thread | Next Thread
Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Tax Implications of Selling from an ESPP Date: 7/12/2001 11:32 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Howdy All -

BW and I are planning on selling some stock we have in an ESPP. We've been participitating for a couple of years. We're planning on doing 2 things:

1) Sell some to pay off CC and Student Loan debt completely (yay!)
2) Transfer shares to a charity

Before I do any of this, I want to make sure I'm maximizing my tax advantages. Would any of you mind talking me through some of this?

First off, the program allows me to buy stock at about 85% of market value. Sometimes, I can buy at less than that, but at least 85% of the value the day I buy it, which is each pay period.

I think what makes this so complicated is the fact that there are tax implications for:

1) income tax (purchase price vs market price the day the stock was purchased) and for

2) capital gains(market price the day the stock was purchased vs actual selling price).

...then there are 1 year holding rules for 1) long term vs short term gains tax rates and 2) ability to write off gains to as a charitable deduction.

Here's what I've done:

-I've created a spreadsheet with all my transactions from late 1998.
-I've included columns for Date, # Shares, purchase price, Closing Price the day I bought my shares, and potential selling price.
-For tax purposes, I've created 3 tax impact columns for each lot: income tax impact, capital gains impact and the sum of the two. I've also created another 3 columns of the same, but per share, not per lot.

What I'm trying to figure out:

-Which shares should I sell to pay off debt?
-Which shares should I gift to charity?

What I think I should do:

I think I should:
-give the shares with the highest income tax impact to charity
-sell the shares with the highest capital gain impact because I should be able to offset capital gains with capital losses. (I was stupid and lost several hundred dollars trying to learn how to buy option calls. Will my theory work?)

(By the way, I noticed a negative correlation between capital gains tax impact and income tax impact, which makes my job easier, right?)


I'm sure there are a lot of things that I haven't included, so please let me know if you have any questions.

Thanks for all your help.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52543 of 121061
Subject: Re: Tax Implications of Selling from an ESPP Date: 7/13/2001 5:42 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I think I should:
-give the shares with the highest income tax impact to charity
-sell the shares with the highest capital gain impact because I should be able to offset capital gains with capital losses. (I was stupid and lost several hundred dollars trying to learn how to buy option calls. Will my theory work?)


The shares given to charity have to be long term gains. You can't use the FMV of the transfered stock for short term gains. I don't think you'd pay taxes, but your deduction is less. I do think you pay income taxes on the wage portion, reguardless (ie the discount) Also, the long term rules can trip you up too. See:

http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p52604.htm

Therefore, you're paying taxes on the discount regardless. You want the largest long term capital gains to charity. You'll want the short term gains to offset capital losses.


Print the post Back To Top
Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52546 of 121061
Subject: Re: Tax Implications of Selling from an ESPP Date: 7/13/2001 9:42 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I forgot to add an important reminder. There are two holding periods for ESPP. To get long term treatment you have to hold two time periods have to pass. It has to be two years from the date the option was granted and then one year from the exercise of the option.

Print the post Back To Top
Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52554 of 121061
Subject: Re: Tax Implications of Selling from an ESPP Date: 7/14/2001 6:14 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
OK, I've heard of this concept before, but I don't really understand it in practice. Can you talk me through an example?

The company requires us to enroll once per year up until about a year ago, and now we can enroll twice per year. For each period we need to state ahead of time the % of our gross pay we will allocate to the plan, up to 10%. Each pay period, the company will automatically deduct 10% of that paycheck and make discount purchases for us and hold the stock in an equiserve account. **Key point: We can sell the stock at any given time without penalty.** However, if we sell stock purchased in the current offering period, we are not allowed to continue in the plan for the remainder of the period and the next. The 3rd period, we can begin participating again.

I mention that because, the program is very different than a stock option plan.

Period 1: 7/1/98 to 6/31/99
Period 2: 7/1/99 to 6/31/00
Period 3: 7/1/00 to 12/31/00
Period 4: 1/1/01 to 6/31/01
Period 5: 7/1/01 to 12/31/01

So, by your comment, I assume that all the stock I purchased in period 2 can be considered long term gains? It's been 2 years since the first day of the offering period, 7/1/99, and at least one year since each of the individual purchases.


...but wait! determining "the option grant date" is confusing. Is it the first day of the offering period?? or is it the date of each individual purchase??

The IRS has the following to say:

http://www.irs.ustreas.gov/prod/tax_edu/faq/faq-kw68.html

If the holding periods are met, the compensation income is the amount by which the fair market value of the stock at the time you are granted the option exceeds the option price...


My final question is whether the 2 year rule applies to the discount portion? Will the 2year holding rule turn the discount into long term gains?? If so, can I gift period 2 stock to charity? (or is that wishful thinking?)





Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52555 of 121061
Subject: Re: Tax Implications of Selling from an ESPP Date: 7/14/2001 8:16 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
...but wait! determining "the option grant date" is confusing. Is it the first day of the offering period?? or is it the date of each individual purchase??

The IRS has the following to say:

http://www.irs.ustreas.gov/prod/tax_edu/faq/faq-kw68.html

If the holding periods are met, the compensation income is the amount by which the fair market value of the stock at the time you are granted the option exceeds the option price...


OK. I'm quessing here. But I would say it's when you could have exercised the option. If you had enought withheld but waited, it would be when you could have. That however is a wild quess. You need a real expert. Post your question here.

http://groups.google.com/groups?hl=en&lr=&safe=off&group=misc.taxes.moderated

These guys are good. It's moderated. That means the questions and answers are posted daily. Not immediately, like here. But these guys are really good.

<i.My final question is whether the 2 year rule applies to the discount portion? Will the 2year holding rule turn the discount into long term gains?? If so, can I gift period 2 stock to charity? (or is that wishful thinking?)

I don't think so. I believe that will always be wages, unless the stock really tanks.





Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev Thread | Next Thread
Advertisement