Poll: ESPP participants. Do you typically take the money and run or hold for cap gaps treatment.

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Submitted by Coronita on December 20, 2007 - 2:21pm

This is a poll/question for people that work at a company with an employee stock purchase plan. Some companies offers you the ability to use after tax dollars to purchase up to 15% of your gross salary in the company's stock at 20% discount. You then have a choice to sell right away or hold on.


I'm curious. For those of you that participate in your employer sponsored plan. Do you guys actually try to hold on for the long term cap gains, or do you ditch them the moment you can, security at 20% gain? In the past I've been a proponent of taking the 20% gain and paying income taxes, as I didn't trust the companies I worked at to keep up their stock. I now work at a company where the stock doesn't move that quickly one way or the other. Coupled with getting hit with a pretty high tax rate for 2007, I'm thinking of at least deferring till next year. 

20% returns already seems pretty decent to me, as it doesn't seem like the markets I can really do better than this. 




Submitted by Coronita on December 20, 2007 - 2:26pm.

I'm smoking crack today. Double checking my current plan, the contribution is 10% gross, and the stock discount is 15%. Never mind. Why did I think 15%/20% is beyond me.

Poll still applies though. Dump or hold on? 

Submitted by Dukehorn on December 20, 2007 - 2:41pm.

Hold if you think there's some decent advancements over the next few years in the company that'll contribute to an increase in stock price. Dump if you have no clue.

Unless the money is going for some sure thing (such as google or real estate :D), why not stockpile some stock in your company?

That being said, I just went in-house so I won't be facing this decision till next year.

Submitted by sd_bear on December 20, 2007 - 2:53pm.

I can contribute 10% gross salary for a 15% discount.

Personally I always sell the ESPP immediately (assuming we aren't in a blackout period). The way I see it, that 10% is my salary, and I don't want to mess around with it and possibly end up making less than what I would have made had I not been in the ESPP at all. Luckily the stock more than doubled from the purchase price so I made out like a bandit anyway.

My stock options, however, I hold on to. Since it's money I never had to begin with I'm much more comfortable taking a risk with it.

Submitted by pbnative on December 20, 2007 - 3:00pm.

I have an ESPP flip-it rule, because a 15% return makes me happy. Bird in the hand sorta thing. If I felt strongly about a rising stock price, I might hold some of it. (But of course, you have to be careful when you sell, making sure the sale is not based on any info you learned because you work there.)

Submitted by Doofrat on December 20, 2007 - 3:58pm.

If your stock doesn't move much and is relatively safe, then I'd wait for the LT gains, but remember that the state (Ca.) still taxes you fully on it (I could be wrong about this, but unfortunately, probably not).

If you have options, you can exercise and sell those before selling the ESPP because you'll get whacked on the ST gains anyway, that's what I always try to do.

Of course my company had stock that was all over the place, so my perspective is different. I saw a lot of co-workers trying to save a some money on taxes get hit with AMT (buying options) or seeing the stock drop 50% before they sold their ESPPs or options.

So from my perspective with the volatile stock, if it's a good time to sell, don't think about the tax consequences.

Submitted by stansd on December 20, 2007 - 4:19pm.

I've done a good amount of thinking on this. I think the best strategy in general is to do a rolling flip...accumulate a years worth and then flip immediately once it hits the capital gains window. Upside is the certainty of lower taxes and the potential for gain from stock increases. Downside is that you are further exposed to the risk of the company you work for.

That's the ideal: In my situation, I've also had a fair amount of exposure to my company's performance via bonuses or options. Because of this, I've been flipping it immediately.

It's all about your risk tolerance. The highest expected value will come from holding it a year, but you have to weigh that against your tolerance and the other risk exposure you have to the company.

One other thought: if you pay $80 for $100 worth of stock, 10% decline wipes out $10 of wealth. Your tax savings are someing like 10% *$20 = $2. $2 isn't insignificant, but you take on a good amount of risk to save it.


Submitted by cooperthedog on December 21, 2007 - 3:34pm.

One other thought: if you pay $80 for $100 worth of stock, 10% decline wipes out $10 of wealth. Your tax savings are someing like 10% *$20 = $2. $2 isn't insignificant, but you take on a good amount of risk to save it.

This is not correct. A 10% decline wipes out 50% of your ESPP profit, so your tax savings are actually a loss.

In the scenario above (assuming 33% income tax rate vs. 15% cap gains), the breakeven point for flip vs. hold is a share price decline to ~$96.

Submitted by cooperthedog on December 21, 2007 - 3:52pm.

Would/are you purchasing your company's stock on the open market (for your portfolio) vs. other investments?

If you consider your company a BUY:
Retain your ESPP shares until this changes.

If your company is a SELL:
Flip the shares.

If a HOLD:
Determine the value at which a decline would make it breakeven (cap gains vs. income tax), take into consideration the risk free rate of return of the flipped shares during the year holding period (or the avg. return of your portfolio, if you are agressive). Note that the breakeven point is ONLY breakeven if you hold your shares the full year, if you sell before that you are worse off (and if you hold into a serious decline to "save" on taxes, you are far worse off). Also consider that the actual discounted profit is relatively small for all the hassle (e.g. 10% of a 100k salary @ 15 % discount = $1500 with the spread between cap gains and 33% income at $270...

The above generally applies to any investment. Consulting a tax advisor is always wise.

Submitted by cooperthedog on December 21, 2007 - 3:58pm.

One last thought -

A 15% discount is actually a ~17.5% gain on the money you invest into the ESPP.

Submitted by cooperthedog on December 21, 2007 - 3:58pm.

One last thought -

A 15% discount is actually a ~17.5% gain on the money you invest into the ESPP.

Submitted by CBad on December 21, 2007 - 5:13pm.

I guess it would really depend on the company you worked for and how the stock was doing. So far I've kept it and have been pleased. That could change though.

Submitted by stansd on December 21, 2007 - 5:14pm.


I didn't pencil it out on a spreadsheet...was more for illustrative purposes. That said, I was assuming 25% tax rate vs. 15% cap gains.

Under that scenario, it costs you $6.50 to hold (you pocket $95 if you flip, but $88.50 if you hold and the stock declines 10%). However, you have to add to that $6.50 the opportunity cost of the $95 you would have had in the bank (I'm assuming for 1 year). If this earns 5%, you are up to $10.06 in savings by flipping because of the earned interest of $4.75 less additional taxes of $1.19.

The point holds that you take on a good amount of risk by holding. With Opportunity Cost factored into your scenario, I get a breakeven of $99.44.


Submitted by AKguy on December 21, 2007 - 11:39pm.

Back in the day, when I had a decent ESPP, I learned from experience to SELL and SELL immediately. In the final few years I would even sell short a few days before the distribution so as to hedge my position. Some people got burned by delays in having their accounts credited; meanwhile the stock tanked and they lost out.

Holding out for LTCG treatment is a fools errand if the stock is too risky an investment.

SELL SELL SELL. You've already invested you life there; time to diversify.

Submitted by procrastinator on December 22, 2007 - 12:55am.

Your plan is pretty generous compared to mine. I take my measly 5% discount and run. This means placing a market sell order immediately after the shares appear in my brokerage account, which always happens after hours. So you see I am not willing to tolerate much downside risk with this at all. My company does not have a particularly bad outlook, but I figure I have more than enough exposure to its stock price through stock options that I still have. Your situation seems different. There are not too many trading days left in 2007. If you really expect to be in a lower tax bracket next year, I would wait till January.

Submitted by Coronita on December 22, 2007 - 8:11am.

Thanks everyone for your comments. Against my normal pattern, I'm going to hold out at least till next year. Normally I do sell espp shares right awasy, because in the past my companies were pretty volatile. Now, I'm working in a company which moves pretty slow.

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