Employee Stock Purchase Plan (ESPP)
An employer program to buy company stock at a discount, often with a look-back price — and holding-period rules that decide how the discount is taxed.
A qualified ESPP lets you buy shares at up to a 15% discount, sometimes off the lower of the start- or end-of-period price (the “look-back”), which can make the effective discount much larger. Whether your gain is taxed as ordinary income or capital gain depends on how long you hold — a qualifying vs. disqualifying disposition. It's one of the highest-return benefits most eligible employees underuse.
A discount, often with a look-back
A qualified employee stock purchase plan lets you buy company stock at a discount — up to 15% — through payroll deductions over an offering period. The most valuable plans add a “look-back”: the discount applies to the lower of the price at the start or the end of the period, so in a rising stock the effective discount can far exceed 15%. For eligible employees, it's one of the highest-return benefits routinely left unused.
Qualifying vs. disqualifying disposition
How your gain is taxed depends on how long you hold. A qualifying disposition — holding more than two years from the offering date and one year from purchase — taxes part of the benefit at ordinary rates and the rest as long-term capital gain. Sell sooner (a disqualifying disposition) and more of the discount is ordinary income. Either way, the discount itself is taxed; the holding period only shifts the mix.
How Formation handles it
Formation surfaces the ESPP position and its basis alongside the rest of your equity comp, so the discount, the holding-period clocks, and the concentration it adds are visible rather than buried in a payroll portal. When and how to sell stays a conversation with your advisor.
A worked example
Your plan offers a 15% discount with a look-back. The stock starts the period at $20 and ends at $30; you buy at 15% off the lower price — $17 — for stock now worth $30. That's a $13 built-in gain per share, an effective discount well above 15%, with the tax split between ordinary income and capital gain depending on how long you hold.
Frequently asked
How is ESPP stock taxed?
The discount is always taxed. In a qualifying disposition (held long enough), part is ordinary income and the rest is long-term capital gain; in a disqualifying disposition, a larger share is ordinary income. The purchase-date and offering-date prices determine the split.
What is the ESPP look-back?
A look-back applies your discount to the lower of the stock price at the start or end of the offering period. In a rising market it can push your effective discount well beyond the stated percentage.
In Formation
ESPP in your equity-comp picture
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