ESPP: How you are taxed

Transcript of the video:

Light music plays throughout.

Onscreen text:

Employee Stock Purchase Plan: How You Are Taxed

Narrator [off-screen]: With an ESPP plan, decisions you make about your shares determine how you are taxed.

An animation of a woman and a man looking up at a street sign appears. The directions on the street sign read "contributions," "purchase date," "compensation," and "income."

Narrator [off-screen]: On the Purchase Date, your ESPP contributions were used to buy shares at the discounted price, instead of the Fair Market Value of the shares.

Onscreen text:

When you bought shares at the discounted price.

The signpost rotates through each direction, starting with "Purchase Date" which turns red and rises to the top of the pole.

Narrator [off-screen]: You didn't have to pay taxes on the money you used to purchase the shares because your contributions to purchase shares were made after payroll taxes had been taken.

Onscreen text:

The money you used to buy them had already been taxed.

The sign for "Contributions" spins up the pole and turns red as it rises to the top.

Narrator [off-screen]: In buying shares at a discount, though, the difference between what you paid for the shares and the Fair Market Value when you sell the shares is considered income.

Onscreen text: Fair Market Value – Amount paid for shares = Income

The sign for "Income" spins up the pole and turns red as it rises to the top.

Narrator [off-screen]: If you sell the shares, you are responsible for paying taxes on this income. The amount may or may not appear as compensation on your W2 for the year.

Onscreen text: When you sell, you pay taxes on the income.

The sign for "Compensation" spins up the pole and turns red as it rises to the top.

Narrator [off-screen]: After the Purchase Date, you have the option to hold or sell your shares.

A red circle with a calendar illustration appears. A line draws out from that to a blue circle that says "Hold" while another line draws out symmetrically that says "Sell."

Narrator [off-screen]: Whichever you choose to do, you will come across the terms qualifying disposition and disqualifying disposition.

Onscreen text: Whichever you choose, you'll either have a Qualifying or Disqualifying Disposition.

A grey box appears in between the two circles and a line draws down from the word "Hold" towards a blue circle that says "Qualifying Disposition." Beneath the circle is a table representing a timeline.

Narrator [off-screen]: A Qualifying Disposition is when you have held the shares for at least 2 years, plus one day, from the offering date and at least one year after the purchase date.

The words Purchase Date and Year 1 turn bold and blue as the narrator talks. A blue box moves in from the left side of the screen.

Onscreen text: When you sell your ESPP shares after this period of time, the sale will be taxed more favorably.

Narrator [off-screen]: When you sell your ESPP shares after this period of time, the sale will be taxed more favorably.

A line draws from beneath the table down towards a blue box.

Onscreen text: Income = Lesser of discount on offer date or actual gain

Narrator [off-screen]: In a Qualifying Disposition, the lesser of the discount on Offering Date or your actual gain is considered W-2 income and may be taxed at ordinary income tax rates.

A line extends from the Sell circle and draws down towards a blue circle that says "Disqualifying Disposition"

Narrator [off-screen]: If your sale is a Disqualifying Disposition, or anything that doesn't meet the standard for a qualifying disposition, the gain may also be taxed at a combination of ordinary income tax rates and capital gains tax rates. Both types of dispositions are taxed at a combination of ordinary income and capital gains rates.

A line extends from the circle down towards a box. As the narrator mentions "ordinary" and "capital gains" those words become bolded.

Onscreen text: Gain taxed at ordinary income tax rates + capital gains tax rates.

Narrator [off-screen]: You can sell before the holding period is met, but this could be considered a Disqualifying Disposition.

Line draws down and points towards a box that has a shopping cart with animated certificates that leave the cart.

Narrator [off-screen]: If you hold onto your shares at least through the qualifying disposition period just described, you will pay ordinary income tax on the lesser of the discount on the price at the offering date or the sale price minus purchase price.

Onscreen text: If you hold, you'll be taxed on income through Capital Gains Tax

A red dotted line extends from the right side of the box and lands on a grey square. In the square, a stack of papers animates in.

Narrator [off-screen]: When you do sell, you'll file a 1099 tax form and your tax rate may depend on whether your sale meets IRS requirements for a lower tax rate on the profit from the sale of shares. This is considered a Qualifying Disposition.

Onscreen text: When you do sell: file a 1099 tax form.

A white line extends off the right side of the box and lands on a red dot. Above the dot is an icon of a certificate.

Narrator [off-screen]: If you hold onto your shares for more than a year, you have what's called a long-term capital gain. And there are some advantages to holding onto your shares.

Onscreen text: There are some advantages to holding onto your shares.

The line extends to the right beneath the certificate. The line intersects with another red dot before moving up and then turning downwards. The icon of the certificate follows the line as it turns up and down. The line eventually flattens out as the certificate icon moves slowly across the screen just above the line. It then turns down again.

Narrator [off-screen]: However, holding them for longer can open you up to additional risk, because the stock price could go down, more than offsetting tax savings you receive.

Onscreen text: However, holding can open you up to more risk.

Narrator [off-screen]: If you hold and the shares' value is lower when you sell than what you paid, you may be able to claim a capital loss on your taxes the year you sold the shares.

Onscreen text: You may be able to claim a capital loss if the shares' value is lower than when you sell.

A blue arrow sign pointing left extends up out of a red dot. Inside the arrow sign it says "Review insider trading policy before trading."

Narrator [off-screen]: Review your company's insider trading policy before trading, to make sure you are trading during open trading windows and following your company's insider trading policies.

A blue bar sweeps across the screen as it turns white.

Narrator [off-screen]: Still have questions? Give us a call.

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Still have questions?

To talk to a Schwab Stock Plan Specialist, call 800-654-2593.

International participants, call +1-602-355-3408.

Narrator [off-screen]: Or, from your Schwab account, navigate to Equity Awards and click on Knowledge Center.

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Or from your Schwab account, navigate to Equity Awards and click on Knowledge Center.

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FOR GENERAL INFORMATIONAL PURPOSES ONLY.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, legal advisor, or investment manager.

Schwab Stock Plan Services provides equity compensation plan services and other financial services to corporations and executives through Charles Schwab & Co., Inc. ("Schwab"). Schwab, a registered broker-dealer, offers brokerage and custody services to its customers.