Hot topic: Detailed guidance now available for refundable AMT credit

Guide to Employee Stock Purchase Plans (ESPPs)

These plans offer a way to buy stock in the company where you work, often at a discount. The tax rules are mostly favorable, but can be tricky.

Let's make sure we're on the same page. An employee stock purchase plan (ESPP) is not not same as an employee stock ownership plan (ESOP). An ESOP is a retirement plan that invests in stock of the employer. An ESPP, which is our topic here, is a way for you to purchase stock in the company where you work.

Employers can offer qualified ESPPs or nonqualified ESPPs. This discussion is about qualified ESPPs, which are sometimes called 423 plans because that is the main section of the Internal Revenue Code dealing with these plans.

We cover this topic on the following pages:

Overview of Employee Stock Purchase Plans (ESPPs)
These plans provide a good way to build wealth by buying stock in the company where you work.

Buying Shares Through an Employee Stock Purchase Plan (ESPP)
Your purchases aren't deductible, but you don't have to report income when you buy the shares, even if you buy them at a discount.

Dispositions of ESPP Stock
Learn the difference between a disqualifying disposition and a qualifying disposition, and why the distinction matters.

Tax Reporting for Disqualifying Dispositions of ESPP Shares
Generally you have to report compensation income and report capital gain or loss on the sale of the shares.

Tax Reporting for Qualifying Dispositions of ESPP Shares
You may have to report compensation income in this case as well, although the calculation is different.

Flipping ESPP Shares
At many companies you can sell ESPP shares immediately after you buy them. Here's why I don't recommend the practice.