# Employee Stock Purchase Plan Calculator – ESPP Tax and Return Estimates

Written by:
PK

On this page is an employee stock purchase plan or ESPP calculator. The tool will estimate how much tax you'll pay plus your total return on an ESPP investment under three scenarios:

• Holding Period not met, short term capital gains
• Holding Period not met, long term capital gains
• Holding period met

## Using the ESPP Tax and Return Calculator

An ESPP – or Employee Stock Purchase Plan – is an employer perk that allows employees to purchase a company's stock at a discount.

Qualified ESPPs, known as Qualified Section 423 Plans (to match the tax code), have to follow IRS rules to receive favored treatment. The most significant implication for employees is a $25,000 benefit cap. In the most common setup, employees set aside income (usually at a max of 10 or 15%) over six months. They receive a discount of up to 15% on either the market value at the grant date or execution date. Of course, company plans and situations vary quite a bit. Hopefully, this tool helps make sense of things. ### Employee Stock Purchase Plan Tool Inputs Employee Stock Purchase Plans have many complications. To use the ESPP tool, you'll have to gather some data about your plan: #### Company ESPP Inputs • Grant Date Share FMV: The fair market value of the ESPP shares when your company extends the option to buy them. • Exercise Date Share FMV: The fair market value of the ESPP shares when they exercise. • Discount vs. Price (Hit the toggle to flip) • ESPP Discount (%): If your plan is a percentage discount off the lower price at exercise or grant, enter the percentage here. • Price Paid per Share ($): If your plan has a different discount mechanism, enter the price you pay per share. (Also useful if you already know what you paid).
• Shares Bought: Shares bought in this ESPP cycle. Note – the tool will model selling every share you enter here.
• Share Sale Price: The price per share at the time of sale.
• Commission: If you paid (or will pay) a commission to sell, enter it here.

#### Tax Inputs

To calculate the difference in return between holding periods, you need to enter various tax rates.

• Marginal Tax Rate: Enter your marginal tax rate – that is, for each additional dollar you earn, what percentage goes to tax. Be sure to add Federal, State, and Local tax rates, if applicable.
• Short Term Capital Gains Tax Rate: Enter your short term capital gain rate. For many states (and localities), this is equal to the marginal income tax rate.
• Long Term Capital Gains Tax Rate: Enter your long term capital gain tax rate. Again, if applicable, add any state or local taxes.

Depending on how much information you need, the tool has a simplified mode and an advanced mode

The simplified ESPP mode will only show your cost basis, the total tax you owe, plus your gain or loss. The advanced mode will break down income and capital gains and show the various types of tax you'll pay.

For both computations, three major buckets have a significant effect on taxes. The ESPP gives you an option to purchase company shares at a discount – but depending on your holding period, the amount the IRS lets you allocate to capital gains and income will change.

See the sections below for more details about the Disposition and Capital Gains matrix.

#### Simple Calculation

To use the basic tool, click the blue 'Compute ESPP Return and Tax' button.

• Disposition/Capital Gains: Under the corresponding column, you'll see the tax owed and total gain for that holding period and capital gain scenario.
• Cost Basis: Your cost to purchase the shares.
• Total Tax: The tax owed for this scenario.
• Net Gain: Both the dollar gain plus the percentage return on investment for the ESPP investment. (To compute an annualized return, use the CAGR calculator).

To use the advanced tool, click the orange 'Compute & Show Breakdown' button.

• Disposition/Capital Gains: As with the basic calculation, you'll see columns for the disposition and capital gains treatment matrix.
• Ordinary Income: Based on your holding period, the amount of income you recognize when you sell the shares.
• Capital Gains: Again, based on the holding period, this shows the amount of capital gains you realize when selling the shares.
• Income Tax: The amount of income tax you will owe for the three combinations of holding periods and capital gains treatment.
• Capital Gains: Based on your capital gains treatment, the amount you will owe in capital gains taxes.
• Net Gain: The absolute dollar gain plus the percentage ROI on your ESPP investment.

## ESPP Holding Period and Capital Gains Treatment

As you can see in the tool, three major categories determine your final gain on an ESPP investment. I call them:

• Disqualifying/STCG for Disqualifying Disposition, Short Term Capital Gains
• Disqualifying/LTCG for Disqualifying Disposition, Long Term Capital Gains
• Qualifying/STCG for Qualifying Disposition, Short Term Capital Gains

Here's how the two labels interact.

### ESPP Capital Gains Treatment

The capital gains treatment is straightforward – it's defined by the IRS (and matched by most states and localities). In general:

• If you hold an investment for more than one year, it's a Long Term Capital Gain.
• If you hold an investment for under a year, it's a Short Term Capital Gain.

The clock starts ticking when the option is exercised – when you receive the ESPP shares. If you hold the shares for longer than a year, you get to pay the advantaged rate – even if you don't meet the terms for a qualifying disposition.

See more about capital gains taxes in DQYDJ's calculator.

### ESPP Holding Period – and Disposition

Whether your ESPP investment qualifies for superior treatment on the holding period side also boils down to guidance from the IRS.

For a Qualifying Disposition in §423 employee stock purchase plans, you need to hit two benchmarks:

• You must hold the shares for 1 year after you receive them (the same as for capital gain treatment, above)
• You must hold the shares for 2 years after the option was granted (which is often 6 months before you receive the shares)

If you don't meet both benchmarks and sell early, it is a Disqualifying Disposition.

Why bother holding longer?

• Qualifying Disposition: Income is the difference between the lower of the fair market value at the grant date or sale date and the price you paid. (With a minimum of \$0). However, there is no provision for the exercise price – this can cause you to owe more income taxes than you'd otherwise expect in certain scenarios.
• Disqualifying Disposition: Income is the difference between the fair market value at the execution date and the price you paid.

Qualifying dispositions can be quite a good bonus – especially when your share price takes off during the offering period! And with either disposition, you don't recognize income until you sell your shares.

## ESPP: An Excellent Corporate Perk

Your stock purchase plan is an excellent benefit.

None of this is investment advice. But: except in the exceptional circumstance that your company goes bankrupt, it's nearly a no-lose scenario. By giving up liquidity for a specific holding period, you get a large gain on the back-end.

And while you certainly should heavily weight selling right away and diversifying your investments – it's complicated. By holding your ESPP shares longer, you can defer income until it's more advantageous to recognize it (perhaps after moving out of a high tax state?).

In the mood for other investment calculators? Try these:

### PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and lives in New Hampshire with his wife, kids, and dog.

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