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Employee Stock Purchase Plan Tax: How ESPP Taxes Work
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Employee Stock Purchase Plan Tax: How ESPP Taxes Work
ESPP taxes depend on your purchase discount, your profits from selling the shares and how long you held the shares.
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14 years of experience Expertise Financial advisors employee equity 529 plansTaryn Phaneuf is a lead writer & content strategist covering wealth management, financial planning and other investing topics at NerdWallet. She previously reported on personal finance news. Prior to joining NerdWallet, she spent more than a decade covering education, public policy and business for various news outlets. She also taught journalism as an adjunct instructor at her alma mater, the University of Minnesota.
Taryn Phaneuf is a lead writer & content strategist covering wealth management, financial planning and other investing topics at NerdWallet. She previously reported on personal finance news. Prior to joining NerdWallet, she spent more than a decade covering education, public policy and business for various news outlets. She also taught journalism as an adjunct instructor at her alma mater, the University of Minnesota.She lives in Minnesota.
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23 years of experience Expertise Taxes Small business Social Security and estate planning Home services RIATina Orem is an editor and content strategist at NerdWallet. Prior to becoming an editor and content strategist, she covered small business and taxes at NerdWallet. She has a degree in finance, as well as a master's degree in journalism and an MBA. Previously, she was a financial analyst and director of finance at public and private companies. Tina's work has appeared in a variety of local and national media outlets.
Tina Orem is an editor and content strategist at NerdWallet. Prior to becoming an editor and content strategist, she covered small business and taxes at NerdWallet. She has a degree in finance, as well as a master's degree in journalism and an MBA. Previously, she was a financial analyst and director of finance at public and private companies. Tina's work has appeared in a variety of local and national media outlets. Published in Editor & Content Strategist + more + moreInvesting in your company’s stock through an employee stock purchase plan (ESPP) can be a valuable workplace benefit that boosts your compensation. But ESPPs come with their own set of tax rules.
Investing in your company’s stock through an employee stock purchase plan (ESPP) can be a valuable workplace benefit that boosts your compensation. But ESPPs come with their own set of tax rules.ESPP taxes generally consist of taxes on profits from the sale of shares you purchase through the ESPP, as well as taxes on the price discount you may have received through the ESPP when you bought the shares.
ESPP taxes generally consist of taxes on profits from the sale of shares you purchase through the ESPP, as well as taxes on the price discount you may have received through the ESPP when you bought the shares.You’ll have to report any ESPP-related income in your annual tax return
You’ll have to report any ESPP-related income in your annual tax return IRS.gov. Stocks (options, splits, traders). Accessed Mar 26, 2026. . Understanding how ESPPs are taxed may help you make smart choices with your investments — and avoid any surprise tax bills.How ESPP taxes work
How ESPP taxes workESPP taxes can be complex because there are so many factors to account for. The first is whether you’re enrolled in a qualified plan.
ESPP taxes can be complex because there are so many factors to account for. The first is whether you’re enrolled in a qualified plan.Qualified ESPPs have to meet regulatory requirements, which unlocks certain tax advantages described below
Qualified ESPPs Qualified ESPPs have to meet regulatory requirements, which unlocks certain tax advantages described below Office of the Law Revision Counsel of the United States House of Representatives. 26 USC 423: Employee stock purchase plans. Accessed Mar 26, 2026. . Participants in qualified plans typically won’t owe any taxes until they sell their shares.Non-qualified ESPPs have more flexibility but don’t provide the same tax benefits. Typically, participants in non-qualified plans owe taxes on the discount they receive at the time the ESPP purchases the shares. Then, they owe taxes on any gains they earn when they sell their shares.
Non-qualified ESPPs Non-qualified ESPPs have more flexibility but don’t provide the same tax benefits. Typically, participants in non-qualified plans owe taxes on the discount they receive at the time the ESPP purchases the shares. Then, they owe taxes on any gains they earn when they sell their shares.For qualified plan participants, your ESPP taxes depend on three key pieces of information.
For qualified plan participants, your ESPP taxes depend on three key pieces of information. AdvertisementGet matched to a financial advisor for free with NerdWallet Advisors Match.
Tax factor #1: The discount you received
Tax factor #1: The discount you receivedThe discount you got on the price of your company’s stock is the difference between the fair market value of the stock and the price you paid for it. For example, if your ESPP provides a 15% discount on stock purchases and the stock is trading at $15 per share on the day of the purchase, you get to buy the shares for $12.75, for a discount of $2.25 per share. If you bought 100 shares, your total discount was $225.
The discount you got on the price of your company’s stock is the difference between the fair market value of the stock and the price you paid for it. For example, if your ESPP provides a 15% discount on stock purchases and the stock is trading at $15 per share on the day of the purchase, you get to buy the shares for $12.75, for a discount of $2.25 per share. If you bought 100 shares, your total discount was $225.The discount ($225, in this example) is usually taxed as ordinary income, which means it’s taxed at your marginal income tax rate.
The discount ($225, in this example) is usually taxed as ordinary income, which means it’s taxed at your marginal income tax rate .But there’s a caveat: The discount that’s used to determine your tax liability may differ from the discount you actually received. That’s because the share price that is used to calculate your discount for tax purposes could be either the price of the stock on the offering date or the price of the stock on the purchase date. And which one is used will depend on how long you held the stock. More on that below.
But there’s a caveat: The discount that’s used to determine your tax liability may differ from the discount you actually received. That’s because the share price that is used to calculate your discount for tax purposes could be either the price of the stock on the offering date or the price of the stock on the purchase date. And which one is used will depend on how long you held the stock. More on that below.» Have stock options instead? When to exercise employee stock options
» » Have stock options instead? Have stock options instead? When to exercise employee stock options 🤓 Nerdy TipIf your ESPP has a “lookback” feature, the price you pay (and receive a discount on) could be either the market price on the offering date or the market price on the purchase date — whichever is lower.
If your ESPP has a “lookback” feature, the price you pay (and receive a discount on) could be either the market price on the offering date or the market price on the purchase date — whichever is lower.Tax factor #2: How much you sold the stock for
Tax factor #2: How much you sold the stock forIf the stock increased in value after you purchased it, you may owe taxes on the gain (the profit) when you sell the shares. (Alternatively, if the value decreased, you may be able to deduct the loss on your taxes.) The gain is the difference between what you paid for the stock and what you got from the sale.
If the stock increased in value after you purchased it, you may owe taxes on the gain (the profit) when you sell the shares. (Alternatively, if the value decreased, you may be able to deduct the loss on your taxes .) The gain is the difference between what you paid for the stock and what you got from the sale.Picking up our previous example, let’s say you decide to sell those shares when the price reaches $20 (up from $15 on the purchase date). Your capital gain is $5 per share, or $500 for 100 shares.
Picking up our previous example, let’s say you decide to sell those shares when the price reaches $20 (up from $15 on the purchase date). Your capital gain is $5 per share, or $500 for 100 shares.The actual capital gains tax rate you pay depends on how long you’ve held the stock (more on that below), as well as your tax-filing status and other taxable income.
The actual capital gains tax rate you pay depends on how long you’ve held the stock (more on that below), as well as your tax-filing status and other taxable income.Tax factor #3: How long you held the stock
Tax factor #3: How long you held the stockWhen you sell, your ESPP taxes may depend on whether you meet two holding-period requirements:
When you sell, your ESPP taxes may depend on whether you meet two holding-period requirements:You held the stock for at least a year. The one-year mark is based on the purchase date, which is the day the ESPP used your accumulated contributions to buy the stock.
You held the stock for at least a year. You held the stock for at least a year. The one-year mark is based on the purchase date, which is the day the ESPP used your accumulated contributions to buy the stock.It’s been two years or more since the offering date. The offering date is the start of your plan’s offering period. It may also be called the grant date or the enrollment date.
It’s been two years or more since the offering date. It’s been two years or more since the offering date. The offering date is the start of your plan’s offering period. It may also be called the grant date or the enrollment date.If you meet both holding-period requirements, the IRS typically considers the sale a qualifying disposition, and you may get a more favorable tax treatment.
If you meet both holding-period requirements, the IRS typically considers the sale a qualifying disposition, and you may get a more favorable tax treatment.Your discount is calculated based on the offering date or the purchase date stock price — whichever is lower. It’s considered ordinary income and taxed at your marginal tax rate.
Your discount Your discount is calculated based on the offering date or the purchase date stock price — whichever is lower. It’s considered ordinary income and taxed at your marginal tax rate.Your gain is taxed at the typically lower capital gains tax rate.
Your gain Your gain is taxed at the typically lower capital gains tax rate.If you don’t meet both holding requirements, the IRS considers the sale a disqualifying disposition, and your tax liability changes.
If you don’t meet both holding requirements, the IRS considers the sale a disqualifying disposition, and your tax liability changes.Your discount is calculated based on the purchase date stock price. If the stock price on the purchase date was higher than the stock price on the offering date, it may mean a larger portion of your income is taxed at the marginal tax rate.
Your discount Your discount is calculated based on the purchase date stock price. If the stock price on the purchase date was higher than the stock price on the offering date, it may mean a larger portion of your income is taxed at the marginal tax rate.Your gain could be taxed as ordinary income unless you’ve held the stock for more than a year (meeting the first of the two holding period requirements). If you have, it’ll be considered a long-term capital gain that’s typically taxed at a lower rate.
Your gain Your gain could be taxed as ordinary income unless you’ve held the stock for more than a year (meeting the first of the two holding period requirements). If you have, it’ll be considered a long-term capital gain that’s typically taxed at a lower rate.MORE: Check out our guide to equity compensation
MORE: MORE: Check out our guide to equity compensationUnderstanding ESPP taxes
Understanding ESPP taxesUnderstanding how time affects tax rates can be complicated, so here’s another way of looking at it.
Understanding how time affects tax rates can be complicated, so here’s another way of looking at it.Discount tax treatment
Discount tax treatment
Discount tax treatmentGains tax treatment
Gains tax treatment
Gains tax treatmentDisqualifying sale, short-term capital gains
Disqualifying sale, short-term capital gainsWhat gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date.
What gets taxed: What gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date.Tax rate: Ordinary income.
Tax rate: Tax rate: Ordinary income.What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.
What gets taxed: What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.Tax rate: Short-term capital gains.
Tax rate: Tax rate: Short-term capital gains.Disqualifying sale, long-term capital gains
Disqualifying sale, long-term capital gainsWhat gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date.
What gets taxed: What gets taxed: The difference between the discounted price you paid and the stock price on the ESPP purchase date.Tax rate: Ordinary income.
Tax rate: Tax rate: Ordinary income.What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.
What gets taxed: What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.Tax rate: Long-term capital gains.
Tax rate: Tax rate: Long-term capital gains.Qualifying sale
Qualifying saleWhat gets taxed: The difference between the discounted price you paid and the stock price on either the ESPP offering date or the ESPP purchase date — whichever is lower.
What gets taxed: What gets taxed: The difference between the discounted price you paid and the stock price on either the ESPP offering date or the ESPP purchase date — whichever is lower.Tax rate: Ordinary income.
Tax rate: Tax rate: Ordinary income.What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.
What gets taxed: What gets taxed: The difference between the fair market value of the stock on the purchase date and what you got from the sale.Tax rate: Long-term capital gains.
Tax rate: Tax rate: Long-term capital gains.Need help? Read our guide to choosing a financial advisor
Need help? Need help? Read our guide to choosing a financial advisorESPP tax calculator
ESPP tax calculatorWhether you’re considering the tax implications of a recent sale or planning ahead, our ESPP tax calculator can show you what your tax liability might be under the common scenarios described above.
Whether you’re considering the tax implications of a recent sale or planning ahead, our ESPP tax calculator can show you what your tax liability might be under the common scenarios described above.The calculator allows you to enter the marginal tax rate and capital gains tax rate that applies to you based on your taxable income. All other information should be available to you through your ESPP administrator.
The calculator allows you to enter the marginal tax rate and capital gains tax rate that applies to you based on your taxable income. All other information should be available to you through your ESPP administrator.ON THIS PAGE
How ESPP taxes work How ESPP taxes work Understanding ESPP taxes Understanding ESPP taxes ESPP tax calculator ESPP tax calculatorON THIS PAGE
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