ESPP Disposition

[Stevehofwa]

Just wanted to get the final word on this topic which causes great confusion and is often poorly explained or even wrong(as in some online calculators).  For the typical plan, there is a grant date and a purchase date.  Often there is a provision to get the lowest price of the two minus some discount(like 15%).

There are two kinds of disposition(sale).  Qualifying is two years after the grant date, and one year after purchase.  Disqualifying is before that.  
For the qualifying disposition, the ordinary income is the discount applied to the FMV at the grant date, regardless of what price you actually paid. This is detailed in IRS 423(c), which says “Section 423(c) provides a special rule for calculating the timing and amount of compensation income that must be recognized in the event of a qualifying disposition when the exercise price is less than 100 percent of the value of a share on the date of grant. Generally, the compensation income recognized is the lesser of: (a) the excess of the fair market value of the share on the date of grant over the exercise price, and (b) the excess of the fair market value of a share at the time of disposition (or death) over the price paid per share. The flush language of section 423(c) provides that if the exercise price is not known on the date of grant, the exercise price shall be determined as if the option were exercised on the date of grant.”

This is often confused to mean the difference between the grant price and what was actually paid, in error on a number of online calculators.

For a disqualifying disposition, the ordinary income is the difference between the FMV at the purchase date and the actual price paid.  
So if the price went down from grant date to purchase date, it’s possible the disqualifying could be lower tax.  Of course, you still have to pay cap gains on the difference between the sales price and the price paid, minus the ordinary income.  And if not held for one year, at short term(ordinary) rates.

I think this is correct, but still see a lot of wrong info out there.

[tagteam]

@Mike9241 

[Stevehofwa]

What does “flush language” mean, exactly?

[tagteam]

Text without a number or letter preceding it and typically "flush" to the margin.

[Stevehofwa]

Thanks, I thought maybe it had some other legal meaning.  IRS uses an alternate form of English.

I’m clarifying all this because of a situation where a company is likely to be sold to a private firm, and all held shares sold in 2023.  I have:

1. Regular purchased shares, long term.

2. ESPP shares, likely to be a mix of qualifying, disqualifying, with some short term.

3. RSU shares, some to be accelerated grants paid at sale.

so a mess, but profitable.

I had a few questions:

1. Short term gains can be offset by long term losses, only if they are in excess of long term gains?

2. Short term gains can be taxed up to the ordinary rate PLUS net investment income tax, if it applies-so that’s the highest rate in the tax code.  I think RSUs when vested are ordinary income and not s short term gain.