If the share price increases between the date of the offer and the date of purchase and you have a Lookback provision, you can buy shares at the best purchase price and offer price. This means that you can buy shares through the ESPP at a price of $50 if the current market price (the purchase price) is $100. (This is a visual example of the value of making look-back available.) In addition, you get a 15% discount on the offer price of $50, so your actual purchase price is $42.50 per share. However, choosing one of these two strategies is not so simple. Depending on when and how you sell your shares, it can take into account different things regarding income tax, investment risk, planning rules and concentrated equity – all of which should influence the option you choose. PSEs generally do not allow the participation of individuals holding more than 5% of the company`s shares. There are often restrictions that do not allow employees who have not been employed in the company for a certain period of time, often a year. All other employees generally have the opportunity, but not the obligation to participate in the plan. If you choose to keep your shares beyond Option 1, you may need to consider market volatility, taxes, concentrated equity and other financial programming issues. In general, your plan follows the following process (in turn, you consult your plan document for rules specific to your program): If you simply want to cash in the proceeds of your PSP, the immediate sale of your staff shares may be a good idea. Forecasts or other information on the likelihood of different investment results are hypothetical, do not reflect actual investment results and are not guarantees for future results. Suppose your corporate shares are currently traded at $50 per share and the company offers a 15% discount.
If you decide to sell immediately, buy shares for $42.50 and sell for $50. That`s an instant gain of $7.5 per share, just because you had to buy at a discount. You might have the argument that selling ASAP is the best strategy, because selling your shares right away allows you to sell any immediate profit through the fact that you bought at a discount, but at the current fairmarket value. Once the shares are purchased, you are subject to the normal risk of owning shares and you should have a strategy to manage that risk. Assuming you can sell ASAP and they have a provision of your plan, we will look at the possible results of using your PSP in this way in three different scenarios. We assume that the share price rises, that the share price remains the same and that the share price drops between the date of the offer and the date of purchase. Let`s also assume that the offer price for the stock is $50 per share. The tax rules for PSPS are complex. As a general rule, qualified orders are imposed in the year of the sale of shares.
Any discount offered on the initial share price is taxed as normal income, while the remaining profit is taxed as a long-term capital gain.