Unfamiliar with selling stock and taxes implications...

[Atty]

So last year I started buying stock in my company. We get a good deal, we can choose up to a certain percent of our pay to be set aside pre-tax to purchase stock with. We buy it at intervals throughout the year with what is accumulated and its bought at a discounted rate. You can't not make money on the stock as you are always buying it at a lower price than it is on the day of purchase.

Now my curiosity comes at cashing that stock out. All of it is in a E-Trade account that I can log into and I have buying and selling options for it. I can transfer the money to my accounts, whatever I need.

My questions -
When does capital gains come into play? How long do I need to hold onto the stock before I can sell it and not be penalized? What are the penalties? How does it affect my taxes? Is there a penalty difference from selling at a loss or a gain?

I'm in my early 20s and this is the first time I've ever ventured into this realm. Every source online I've found was a bit too complicated.

Thanks!

 

[jhu]

You should make sure it's a retirement account because that's what it sounds like. If that's the case, then there are no tax implications until you take the money out since you (or your employer) are presumably putting pretax money into the account.

 

[MomentsofSanity]

In general terms you are looking at the difference between short term and long term capital gains. A tax lot held for more than one year is considered long term which typically has a more favourable tax treatment.

Also if any of the lots are sold at a loss in the account and you buy into new positions within 30 days on either side of the realized loss you will trigger a "wash sale". Basically the loss is added to the cost basis of the newly acquired position and you lose the ability to claim that loss on taxes until the new position is sold.

No penalties if it's in a regular taxable account. Definitely clarify to ensure it's not a retirement account as stated above. Then the rules change. Penalties in an IRA would typically be 10% if you're under 59 1/2. Plus any applicable federal and state taxes. This only if you distribute money out, not when you do sales. There are ways to avoid those penalties in very specific circumstances.

It sounds like it is probably a 401K from what you've said.

I am a licensed broker and a retirement account specialist. Feel free to PM if you have more detailed questions if you'd like.

 

[Atty]

It sounds like it is probably a 401K from what you've said.

Hmm. I have a 401k through my company too (both traditional and roth) so I would be surprised if this was too. On my account page for E-Trade it doesn't list anything telling me of its retirement, 401k, etc. I am asking E-Trade now.

E: E-Trade says its a normal trading account and not a retirement account.

"The tax treatment when you sell shares depends on whether you make a disqualifying disposition or not." I think I found what I am looking for. I don't fully understand it yet though. Hmmm.

What is a Disqualifying Disposition?
An employee stock purchase plan (ESPP) provides an opportunity to use part of your compensation to buy stock of the company where you work. If the plan is qualified under Section 423 of the Internal Revenue code, you pay no tax when you buy the stock, even if the amount you pay is less than the value of the stock. The tax treatment when you sell shares depends on whether you make a disqualifying disposition or not. To avoid a disqualifying disposition, you must hold the shares long enough to meet two separate requirements. First, you must not sell the shares for at least two years and one day after the ESPP enrollment date, which is generally the start of the plan period in which you bought the shares. Secondly, you must not sell the shares for at least one year and one day after the date of purchase, which is generally the end of the plan period in which you bought the shares. You must hold the stock long enough to meet both holding periods. If you fail to satisfy either holding period, your sale is considered a disqualifying disposition.
A portion of Qualified Disposition is considered ordinary income, this is usually the lesser of: • Discount on shares
• Or Sale price — Purchase price (CAN NEVER BE LESS THAN ZERO)
Impact of Disqualifying Disposition
In general, selling stock in a Disqualifying Disposition will trigger compensation (ordinary) income. The amount of the compensation income is generally the excess of the fair market value of the employer stock on the date of the purchase, over the discounted purchase price at the time of the purchase, even if the price declined by the time the stock was sold. This income will be added to the purchase price of the stock to determine your adjusted basis of the employer stock and reported on Schedule D of the tax return.

I am getting lost reading this. Mainly on what the implications of a disqualifying disposition is.

Also, I didn't notice any personal information that wouldn't be advisable to be shared in that quoted text. Please let me know if anyone sees different.

 

[Schfifty Five]

Sounds like a pretty standard employee stock option program.

As far as selling it, i'd first check w/ your company to see if there are any policies in place that require you to hold that stock for a certain amount of time. Once you've done that and you are in the clear, if you wanted to sell the stock, you would just do it via E-Trade.

E-Trade will then determine how much realized gain (or loss) you incurred and will provide you with tax statements at the end of the year that you sold the stock. Once you have that, you will be required to file your taxes with sale of stocks and will be hit with capital gains tax. I am not sure what changes there are in 2014 for capital gains tax.

 

[esun]

Hmm. I have a 401k through my company too (both traditional and roth) so I would be surprised if this was too. On my account page for E-Trade it doesn't list anything telling me of its retirement, 401k, etc. I am asking E-Trade now.

E: E-Trade says its a normal trading account and not a retirement account.

"The tax treatment when you sell shares depends on whether you make a disqualifying disposition or not." I think I found what I am looking for. I don't fully understand it yet though. Hmmm.



I am getting lost reading this. Mainly on what the implications of a disqualifying disposition is.

Also, I didn't notice any personal information that wouldn't be advisable to be shared in that quoted text. Please let me know if anyone sees different.

Taking that section bit by bit:

you pay no tax when you buy the stock

You have no tax liability from buying the stock. (This differs from other stock transactions where if you purchase the stock below the fair market value, you are taxed on the difference as income.)

you must not sell the shares for at least two years and one day after the ESPP enrollment date

You have to wait 2 years + 1 day after your enrollment date before selling.

you must not sell the shares for at least one year and one day after the date of purchase

And you have to wait 1 year + 1 day after purchasing before selling. Enrollment and purchase may go hand in hand or may not. Conceivably you could enroll without purchasing and decide to purchase later.

A portion of Qualified Disposition is considered ordinary income

The portion you are taxed on will be taxed as income (see http://en.wikipedia.org/wiki/Income_tax_in_the_United_States for a table of marginal rates).

this is usually the lesser of:
• Discount on shares
• Or Sale price — Purchase price (CAN NEVER BE LESS THAN ZERO)

So discount on shares would be the amount below the fair market value that you paid for the shares. For example, if the FMV was $10/share and you paid $9/share for 1000 shares, the discount on the shares would be (10-9)*1000 = $1000.

The sale price minus purchase price is kind of obvious. Take the amount you sold it for and subtract the amount you purchased it for.

Your tax liability would be the lesser of those two values.

So the idea is that if you buy and sell on the same day using this scheme then you will get taxed on the discount as income (this will be the same as the sale price - purchase price because on the day of the transaction these are the same! You purchase at the discounted price and sell at the FMV that day). If you make $100k/year this will be taxed at 28% for example. That excerpt doesn't specify this but based on some Googling if you can hang on to it for the required period of time, it will be taxed as a long-term capital gain (15% for that same $100k bracket).

At least I think that's how it works. I'm not a tax expert by any means, though, just trying to help interpret the language.

 

[DaWhim]

my old company offered discount price for company stock, like 5%.

so you have a price you pay for the your stock, this is your cost basis.

if the market price fro your company is 100, you have a 10% discount and 5 bucks transaction fee, you cost basis is $95 (100*.9 + 5)

There is long term and short term cap gain, holding the stock over 365 days or under.
short term cap gain = your ordinary income rate
long term cap gain = lower like 15-20% depends on your tax bracket.

capital gain is when you sell the stock (minus transaction cost), if you make money, that's cap gain.

refer to above example, if you sell it for 95.01, the 1cent is your cap gain and subject to taxes

 

[Imp]

Not going to offer many details, but I've being doing my own taxes for the past few years and learned to do the stocks portion off the interwebs pretty easily. Haven't been audited yet, so fingers crossed. Basic buy/sell and dividends are much easier than margin and options.

Some basic things to look into: wash trade, qualified and ordinary dividends, proceeds of sale, adjusted cost basis.

 

[JEDI]

my company started offering 15% employee stock discount plan w/o restrictions.

needless to say they quickly added "must hold for xx months b4 selling" cause everyone and their mother sold the day those stocks hit their accts. (instant 15% raise )

 

[Atty]

my company started offering 15% employee stock discount plan w/o restrictions.

needless to say they quickly added "must hold for xx months b4 selling" cause everyone and their mother sold the day those stocks hit their accts. (instant 15% raise )

That is how mine works but without any restrictions on selling it, at least set in place by our company. The IRS obviously has its own restrictions lol.

My worry is that I sell my stock I purchased at lets stay $100 but is valued at $300. $200 profit instantly right? Then, at the end of the year my taxed rate on the sale is 30% and my gain wasn't worth it.

I'll have to research it more and figure out the exact loss if I sell before my 2 year period to see what its worth.

Thanks again to everyone for the info.

 

[Aaviel]

The way my company does it is that we get "extra" stock rather than a discount. So if I purchase $100 of stock, I will get $115. As a result, there are no inherent capital gains from it.


IIRC I got ~$1.5k from this, but didn't actually have to pay any taxes since the capital gains/losses were a wash.

 

[br0wn]

That is how mine works but without any restrictions on selling it, at least set in place by our company. The IRS obviously has its own restrictions lol.

My worry is that I sell my stock I purchased at lets stay $100 but is valued at $300. $200 profit instantly right? Then, at the end of the year my taxed rate on the sale is 30% and my gain wasn't worth it.

I'll have to research it more and figure out the exact loss if I sell before my 2 year period to see what its worth.

Thanks again to everyone for the info.

If you sell you stock instantly, let say your taxed rate is 30%, it is of the $200 profit (rather than the sale price): so the tax you pay is $60. So you won't lose money (you gain $140 in this example). If you hold the stock for at least a year, then the tax rate is 15 or 20% (long term capital gain tax) depending on your tax bracket.

 

[CPA]

my company started offering 15% employee stock discount plan w/o restrictions.

needless to say they quickly added "must hold for xx months b4 selling" cause everyone and their mother sold the day those stocks hit their accts. (instant 15% raise )

It's due to IRS regulations on how the gain would be recongnized. They can't stop you from selling. They're telling you you need to hold for 24 months in order not to be hit as ordinary income, which, btw, your company's payroll department has to process. After 24 months, it's a long-term gain and you're on your own on reporting it.

 

[quikah]

That is how mine works but without any restrictions on selling it, at least set in place by our company. The IRS obviously has its own restrictions lol.

My worry is that I sell my stock I purchased at lets stay $100 but is valued at $300. $200 profit instantly right? Then, at the end of the year my taxed rate on the sale is 30% and my gain wasn't worth it.

I'll have to research it more and figure out the exact loss if I sell before my 2 year period to see what its worth.

Thanks again to everyone for the info.

What you decide to do is going to be based on how much risk you are willing to take.

You can sell immediately and pay short term cap gains, you lock in your profits and don't have to stress out if the stock market crashes. You pay a bit higher tax this route.

You can wait for your 2 year period to sell and get better tax treatment, but the stock can tank in that time (or go higher).

So, how risk averse are you? What does your company stock history look like? Are you aware that the stock market is kind of high right now, might be due for a correction (or maybe not).

If your company stock hasn't done anything in the last few years, might be better to just wait it out.


My experience. I had a round of ESPP that I held onto because the stock admins screwed up the purchase (got shorted about 20 shares, happened half the company). Think the price was ~$80 at that time. By the time they straightened it out the price had dropped to $70, so I decided to wait it out. 6 months later the price dropped to $20. I sat on that stock for another 1.5 years. It eventually went back to $80, but it was not all that pleasant. It was an IPO, so very volatile.

I generally sell my ESPP immediately.

 

[rh71]

my company started offering 15% employee stock discount plan w/o restrictions.

needless to say they quickly added "must hold for xx months b4 selling" cause everyone and their mother sold the day those stocks hit their accts. (instant 15% raise )

We have first in first out that may prevent instant gain - unless it was a brand new enrollment and you sell right away but we can't buy again in the current 6 month period if we sell any from the current period.