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ESPP: buying and selling your shares

An employee stock purchase plan lets you buy company stock through payroll at a discount, often 15%. Many plans also have a "lookback," which uses the lower of the price at the start of the offering period and the price on the purchase date.

Together, the discount and lookback can make an ESPP one of the best returns available to you. The tax depends on how long you hold the shares, and the 1099-B almost never shows the right basis.

Who it fits
Anyone enrolled in a qualified employee stock purchase plan.
Usually not a fit
Non-qualified ESPPs, where the discount is taxed at purchase. Ask us if you are unsure which you have.
Figures
2026 tax year

The key rule

A qualifying sale happens at least two years after the offering date and one year after the purchase date. Anything sooner is a disqualifying sale, where the discount is taxed as ordinary income and the rest is capital gain or loss.

How it works

Here is how a typical plan works:

  • You choose a percentage of pay to contribute, usually up to 15%.
  • Contributions build up over a purchase period, often six months.
  • On the purchase date, the plan buys shares at a discount to the lower of the offering-date price and the purchase-date price.
  • The shares are deposited into your brokerage account.

Nothing is taxed at purchase. The tax depends on when you sell. For a disqualifying sale, the ordinary income is the difference between the market value on the purchase date and what you paid, even if you sell for less. For a qualifying sale, ordinary income is the lower of your actual gain or the discount measured at the offering date. Either way, the rest is capital gain or loss.

5 steps

  1. Enroll at the right level

    You can buy up to $25,000 of stock per calendar year, measured at the offering-date price. If cash flow allows, contributing the maximum is usually worth it for the discount alone.

  2. Choose a holding plan

    • Sell right away: locks in the discount with little market risk. The gain is ordinary income.
    • Hold for a qualifying sale: can turn part of the gain into long-term capital gain, but you carry the stock risk for up to two years.

    For many people, selling right away is the better trade-off.

  3. Know what your W-2 includes

    Employers usually add ordinary income from ESPP sales to your W-2 in the year of the sale. No Social Security or Medicare tax is withheld on it.

  4. Download the supplemental statement

    Each February, your broker issues a supplemental statement with the adjusted cost basis. Download it with your 1099-B.

  5. Check whether a sale triggers a wash sale

    Selling ESPP shares at a loss within 30 days of a new ESPP purchase or RSU vest can disallow the loss.

Example

A disqualifying sale

The stock is $100 at the start of the offering and $120 at purchase. With a 15% discount on the lower price, you pay $85 a share. You sell right away at $120.

  • Ordinary income: $120 − $85 = $35 a share.
  • Capital gain: none, because your adjusted basis is $120.

Your 1099-B may show basis of $85, which would double-count the $35.

Common mistakes

  • Using the 1099-B basis without adjusting it. The discount gets taxed once on your W-2 and again as a capital gain.
  • Holding for a qualifying sale while the stock falls. The tax savings rarely make up for a large price drop.
  • Forgetting that a refund of unused contributions happens if you leave mid-period.

Key dates

Offering date
Start of the offering period; starts the two-year clock.
Purchase date
Shares are bought; starts the one-year clock.

Questions we hear

Do I pay tax when shares are purchased?

No, only when you sell.

What to send us

  • ESPP purchase confirmations
  • 1099-B and supplemental statement
  • Year-end pay stub

Upload them to your client portal.

General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.

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