Should I enroll in my company's ESPP and sell immediately?

Submitted by TriggerHappy0071 t3_yiocwl in personalfinance

I want to confirm that immediately selling ESPP is always going to be profitable (or almost always, since I'm assuming I will have to manually sell on Etrade when I get the stock granted to me?). My parents were saying that the taxes on the gain isn't worth it, but I'm not understanding their argument. Even if I get taxed at a high rate on the short term gain, I'll still end up making money since I got a 15% discount? This is what the company's ESPP prospectus says.

The purchase price will be the lesser of (i) eighty-five percent (85%) of the fair market value of our Shares on the enrollment date or (ii) eighty-five percent (85%) of the fair market value of our Shares on the exercise date.

A couple of questions:

  1. Does this mean that if the company stock goes up throughout the offering period, I will still only be purchasing stock at the value of the enrollment date and making even more money, even if I sell the shares as soon as I get them?

  2. The company ESPP booklet says that I will not get the shares as soon as I get a payroll deduction Shares will be actually purchased only on the dates determined by the Administrator, which is referred to as the “exercise date” for that offering period. Will there be any lag between me getting the shares on the "exercise date" and being able to sell them? I don't want to wait a long time to sell them as I don't want to hold these shares.

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penguinise t1_iujozz6 wrote

>I want to confirm that immediately selling ESPP is always going to be profitable (or almost always, since I'm assuming I will have to manually sell on Etrade when I get the stock granted to me?).

Yes. As you note, the only technical risk is the few business days between exercise and practical receipt of the shares.

>My parents were saying that the taxes on the gain isn't worth it, but I'm not understanding their argument. Even if I get taxed at a high rate on the short term gain, I'll still end up making money since I got a 15% discount?

Also correct. The discount is ordinary income, on which you would never pay a 100% tax.

>Does this mean that if the company stock goes up throughout the offering period, I will still only be purchasing stock at the value of the enrollment date and making even more money, even if I sell the shares as soon as I get them?

Yes. This is usually called a "lookback" provision.

>Will there be any lag between me getting the shares on the "exercise date" and being able to sell them?

Only an administrative delay. Varies by plan custodian but it is usually 1-5 business days. The shares are delivered "as soon as practicable" but you will have a few days of at-risk time.

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TriggerHappy0071 OP t1_iujqc1t wrote

Great thank you for the answers. I assume the risk of the company stock dropping >15% during that administrative delay is very low then? Thank you!

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penguinise t1_iujqvp2 wrote

>I assume the risk of the company stock dropping >15% during that administrative delay is very low then?

Generally yes. Obviously anything is possible, but it is very unlikely - especially if (as ought to be the case) your company is not reporting earnings during those few days.

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TriggerHappy0071 OP t1_iujriwu wrote

Great thanks, and should I be concerned about this in the booklet?

The Company also may require that such Shares be retained with such broker, trustee or agent for a designated period of time and/or may establish other procedures to permit tracking of disqualifying dispositions or other dispositions of Shares.

Is this typical and would it mean that I have to wait some arbitrary amount of time before I am permitted to sell?

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penguinise t1_iujt4b0 wrote

I think that is saying that they won't permit you to ACATS the shares in-kind to another broker, so that they can no longer track them for tax purposes. There is interplay because selling the shares generates ordinary income which is customarily reported on your W-2.

I would not be concerned about a minimum holding period until a specific policy is actually announced. It's normal not to have one.

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jokerfriend6 t1_iujnxna wrote

There is a lag on when can sell them. Companies will give you a windows on when you can sell the stock. Usually the trading window is blocked before earnings. It takes usually a week or 2 before the period of ESPP ends and before you have the shares to sell. It is possible for the stock to go down in that 2 week period, so there are NO guarantees. I always do ESPP when I can because it is a good investment long term, as long as they company is solid. I usually hold for over a year to reduce my tax burden.

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IStillLikeBeers t1_iuk76ou wrote

This is highly dependent on the ESPP. I get my shares the day the period is over and no blackout dates. So, I can essentially sell the next trading day after the offering period ends.

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TriggerHappy0071 OP t1_iujr2i6 wrote

I see, thanks for letting me know. the ESPP booklet says this, I'm assuming this is what you were referring to as the 1-2 week period?

As soon as reasonably practicable after each exercise date, the Company will arrange the delivery of the purchased Shares to you in a form determined by the Administrator in its sole discretion. The Company also may require that such Shares be retained with such broker, trustee or agent for a designated period of time and/or may establish other procedures to permit tracking of disqualifying dispositions or other dispositions of Shares.

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jokerfriend6 t1_iujridc wrote

Yes. The other period is blockout period where you cannot sell shares. Usually this period is aligned with earnings or a big company announcement that might be known internally so they will not let you trade during that period.

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TriggerHappy0071 OP t1_iujrupx wrote

So essentially does this mean that I can usually sell right away, but during some periods when I have internal information before an earnings report or something I cannot sell the ESPP and be required to hold it?

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Baxford1020 t1_iuka6ue wrote

My company blocks the sale of ESPP shares for 366 days. You should be able to find the information from your provider, company, or HR. We have no way of knowing that.

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TriggerHappy0071 OP t1_iukb258 wrote

I'll double check the handbook I was sent, but the only language I found so far regarding blocking the sale of ESPP was what I posted above, which sounded vague. Thanks!

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jokerfriend6 t1_iujui0z wrote

You cannot sell right away. You will need to hold a couple weeks for the brokerage to get and release the shares.

Also during blackout periods you cannot sell. Usually black out periods are about the quarter of the time but it varies on the company.

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