423-Qualified ESPP Tax Calculator

firebus's picture

Overview

  • An ESPP is a benefit plan that allows employees to purchase stock from their company at below market price. Usually income from your paycheck is withheld for a certain period of time (say, 6 months) and then used to buy stock at the end of the period.
  • Your tax rate for the transaction depends on how long you hold the stock before selling it.
  • To get favorable tax treatment, you have to hold the stock for 2 years after the grant of the ESPP (the start of the withholding period) and 1 year after the stock is purchased. Assuming a 6 month withholding period, you'd need to hold the stock for 18 months after purchase to fulfull the holding period.
  • Since this is a 423-qualfied ESPP, there is no tax when the stock is purchased, only when the stock is sold.
  • I am an accounting hobbyist and not a tax professional. These calculations are just for fun! Don't trust me! Don't blame me! Don't tase me!

Glossary

Disqualifying Distribution
Selling the stock before end of the holding period
Qualifying Distribution
Selling the stock after the end of the holding period
Market Price
The stock price on the open market on the day that the stock is purchased.
Lookback Price
The stock price that is used to set the actual price for employees (the more generous the plan, the longer the lookback
Discount
Employees purchase stock at a discount on the lookback price. Usually between 10% - 15%.
Sale Price
The stock price when you sell
Regular tax rate
Your tax rate for ordinary income
Long-term capital gains tax rate
The current tax rate for long-term capital gains (default 15%)
Investment
How much you will invest in the ESPP in a given period

Calculator

Market price:$
Lookback price:$
Discount:%
Sale price:$
Regular tax rate:%
Long-term capital gains tax rate:%
Investment:$

Results

Results

Purchase price:
Shares purchased:
Income from sale:
Pre-tax profit from sale:
Gain/Loss for qualifying distribution:

Disqualifying Distribution

Regular income:
Short-term capital gains:
Tax:
Net profit:

Qualifying Distribution

Regular income:
Long-term capital gains:
Tax:
Net profit:

Comments

This calculator seems wrong

It's always counting $0 for the capital gains in the disqualifying disposition case....


firebus's picture

I think that's correct...

In a disqualifying distribution, everything is taxed as regular income, nothing is taxed at the more favorable capital gains rate.

But it's been a long time since I wrote this, and I definitely don't have it all in my head anymore! Please don't make any financial decisions based on this calculator (although I did :)


firebus's picture

Wow! Thanks for the details

I'll find some time this weekend to take a closer look.


Also: you are the only free

Also: you are the only free ESPP tax calculator I could find online.
And: ETRade ESPP tax calculator is wrong also.

So compared to the competition, you are really good :)


Thats true. I guess what I

Thats true. I guess what I actually meant that in the disqualifying disposition case, the regular income only include the discount, rather than the total profit.

Example:

Market price: $100
Lookback price: $100
Discount: 15%
Sale price: $200
Regular tax rate: 50%
Long-term capital gains tax rate: 15%
Investment: $85

Disqualifying Distribution:

Regular income: $15 (==> Wrong, should be $115)
Capital gains: $0
Tax: $7.5
Net profit: $107.5

Qualifying Distribution:

Regular income: $15
Capital gains: $100
Tax: $22.5
Net profit: $92.5


firebus's picture

Yes, there's a bug!

Regular income is correct - it's the difference between the price you paid and the market price on the day the stock was purchased.

But capital gains should not be $0 here! We've got short-term capital gains for the difference between the sale price and the market price.

I'm about to update this calculator with a fixed version, and I'll see if I need to make the same fix on the graphing calculator.


so is this the updated one?

so is this the updated one?


firebus's picture

yep

this is the updated one


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