An employee stock purchase plan (ESPP) lets you buy company stock through payroll, usually at a discount of up to 15%. Many plans also have a lookback: the discount applies to the lower of the price at the start of the offering period or on the purchase date.
Nothing is taxed when you buy
For a qualified (Section 423) plan, buying the shares isn't a tax event. The tax comes when you sell, and how it's split between salary-type income and capital gains depends on how long you held the shares.
Qualifying sale
You sell more than two years after the offering start date and more than one year after the purchase date. The part taxed like salary is the smaller of:
- your actual gain (sale price minus what you paid), or
- the discount measured at the offering start date (usually 15% of the start price).
Everything above that is a long-term capital gain.
Disqualifying sale
You sell before either holding period ends. The full discount at purchase (market price on the purchase date minus what you paid) is taxed like salary, even if the stock has since dropped. Anything above the purchase-date price is a capital gain: short-term if held a year or less, long-term if longer.
Example
Start price $20, purchase-date price $30, lookback 15% discount, so you pay $17. You later sell at $40.
| Salary-type income | Capital gain | |
|---|---|---|
| Qualifying sale | $3 (15% of $20) | $20 long-term |
| Disqualifying sale | $13 ($30 − $17) | $10 |
Watch your cost basis
Your broker's Form 1099-B often shows only what you paid ($17) as your basis. The salary-type part is already on your W-2, so add it to your basis or you'll pay tax on it twice.
No withholding
Employers don't withhold on ESPP income, and there's no withholding when you sell. If the gain is large, plan for an estimated payment. See our guide on too little tax withheld.
Try it: add your ESPP purchase in the calculator to see the tax at sale.
Frequently asked questions
Do I pay tax when my ESPP shares are bought?
No. For a qualified plan, tax is due only when you sell the shares.
Is the ESPP discount taxed as capital gains?
No. The discount part is taxed like salary. Only the gain above it can be a capital gain.
Official sources (for the detail-minded)
- IRC §423Rules for qualified employee stock purchase plans
- IRC §421(b)Tax treatment of disqualifying dispositions
- IRS Publication 525Taxable and nontaxable income, including stock purchase plans
Run your own numbers
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Estimates only. Not tax, legal, or investment advice. See our methodology