Question 1

How does an employee stock purchase plan (ESPP) work?

Accepted Answer

An ESPP lets employees buy company stock at a discount, typically 15% below market price, through payroll deductions. During an offering period (usually 6 months), a percentage of your salary is set aside. At the end of the period, the accumulated funds are used to purchase shares at the discounted price. Many plans also include a lookback provision, which sets the purchase price based on the lower of the stock price at the start or end of the offering period, minus the discount.

Question 2

What is the difference between a qualifying and disqualifying ESPP disposition?

Accepted Answer

A qualifying disposition means you held the shares for at least 2 years from the offering date and 1 year from the purchase date. With a qualifying disposition, the discount (up to 15% of the offering-date price) is taxed as ordinary income, and any additional gain is taxed at the lower long-term capital gains rate. A disqualifying disposition (selling before those holding periods) taxes the entire discount as ordinary income at your marginal rate — but you get the proceeds sooner.

Question 3

What is the ESPP lookback provision?

Accepted Answer

The lookback provision means the purchase price is based on the lower of the stock price at the beginning or end of the offering period, minus the discount. If the stock rises during the offering period, you buy at a discount from the lower starting price — creating an even bigger effective discount. For example, if the stock was $100 at offering start and $120 at purchase, a 15% discount with lookback means you pay $85 per share (15% off the $100 offering price) for stock worth $120.

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