Any tax consequence to employee purchase of company stock and no sale?

[brownstaxservice]

employee purchases employer stock at a discount.  no sale at this time

[itonewbie · Accepted solution]

Not until it is disposed of.  What your client has is probably ESPP or ISO.  In order for the preferential capital gain tax treatment to apply, the stocks acquired must not be sold (in what is called a disqualifying disposition) 2 years from the date of grant or 1 year from the date of exercise, whichever is later.

[itonewbie]

In the past, you'd have to be mindful about AMT upon exercise but probably less so going forward.

[brownstaxservice]

What about pre IPO employer stock bought at a discount?  Paid $4.00 a share and valued at $17.00 a share

[itonewbie]

Was that granted as part of a statutory stock option plan or non-qualified stock option plan (NQSO)?

Unless it is an ESPP, the exercise price is usually the FMV on the date of grant.  If NQSO was granted at below FMV, it would be subject to §409A and may be subject to the potentially punitive 20% additional tax and interest charges.

When you say your client paid $4ps, which is valued at $17ps, do you mean the exercise price based on FMV at the time of grant (prior to IPO) was $4ps but the share price at IPO was $17?  If that is the case, the bargain element is ***not*** a discount per se.  It is the exact intention of any stock option plan, which is to incentivize employees to work hard to help the company meet the performance targets and, thereby, increase the share price, so that they can partake in the company's success.