GeorgeM777
Expert Alumni

Investors & landlords

Regarding your first question, in order to have a qualifying sale of ESPP shares, any sale or transfer of ESPP shares has to be held for more than one year after the date of transfer, and for more than two years after the date the options were granted.  In your example, you mentioned that the ESPP shares were held for 18 months after the offering period (i.e. the date the option to purchase was granted).  Therefore, the sale in your example would be a disqualifying sale and thus would not have the same tax advantage as a qualifying sale.  

 

If this holding requirement had been met, then when the shares were sold, the excess of the sale price over the purchase price (the actual gain) is taxed as long-term capital gain. If the purchase price is less than 100% of the fair market value of the shares on the purchase date, then the discount is taxed as ordinary income.

 

A non-qualifying sale is any sale or transfer of the ESPP shares that doesn't satisfy the qualifying disposition rules. Non-qualifying dispositions are sales of ESPP shares that occur before and up to one year after the transfer date or before, and up to two years after the grant date.

 

Under a non-qualified sale, when the shares are purchased, the excess of the fair market value of the shares at the time of purchase over the purchase price (the spread) is taxed as ordinary income. Any additional gain or loss when the employee sells the shares is taxed as capital gain or loss. 
 

It is important to keep in mind that there are instances in a non-qualified sale where you may have to pay tax from your ESPP shares even if you sold the shares at a loss because you are taxed separately on the discount provided by your employer and the later stock sale. 

 

@sidwin516

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