What's your strategy for unloading your ESPP shares?

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What''s your strategy for selling your ESPP shares ?

I have accumulated ESPP shares >300k during the last 5 years of my employment. I have never sold my ESPP shares. Now, I am planning to unload some to reduce risk of excessive exposure to a single stock. Luckily, my company stock has quadrupled in the last 5 years, therefore ,it has been a pleasant ride thus far.

Would love to hear your thoughts on how you manage your ESPP shares as part of your overall portfolio.

Thanks,

[Jack FFR1846]

This is easy for me. Before the buy date, I put in a "sell all at market" order into my eTrade account, where my company puts the shares. The end.

Overall portfolio.....well.....they become cash once settled and moved out of eTrade. I'll then sometimes move the money to Schwab and they buy US equity of some kind, so my AA moves that way a tiny bit.

I do the exact same thing with RSUs. Between the 2, it could be as much as $40k or $50k a year. Not a big considerations with respect to the overall portfolio.

[megabad]

Here’s my little secret, my apparent strategy is to hold on to them. But I think that is stupid. I just can’t stomach the tax bill and keep planning on a low income year or a market decline in which to sell that hadn’t come yet.

[cashheavy18]

I am in the same situation, dating back 15 years though. I have found these shares are an amazing way to donate to charities.

Part of our financial plan is a giving goal each year and all donations are made using the appreciated stock.

[Dottie57]

I sold as soon as allowed.

[loggerboots]

If you've been holding them for a while I think conventional wisdom is to sell them two years after the offering date for best tax treatment. I'm not an expert though and hopefully someone more knowledgeable chimes in. I think after one year the gains go 'long term' but it takes two years for the 'discount' to be treated as long term. Someone will correct me if I'm wrong.

I've been told the best time to sell ESPP shares is when you first get them or after two years.

ETA I consider the ESPP shares part of my domestic stock allocation in my taxable account. The plan is to sell the lots on their second birthday and diversify into my taxable asset allocation (simple 3 fund portfolio) at the appropriate ratios.

[GerryL]

Here’s my little secret, my apparent strategy is to hold on to them. But I think that is stupid. I just can’t stomach the tax bill and keep planning on a low income year or a market decline in which to sell that hadn’t come yet.

Same here. I didn't have a strategy beyond hold. Never did a DRIP, but the stock holdings kept growing for almost 20 years. If I'd known what I was doing, I would have started selling sooner and reinvested in my taxable balanced mutual fund. Now selling them would raise my income into IRMAA territory.

It's a too-big chunk, but I can leave them out of my retirement plan and am still fine -- and the dividends boost my basic income. I'm using the low-cost-basis shares to feed my DAF. If I happen to have a low-income year -- like 2020 with the RMD holiday -- I sell some.

[Aelron]

From a diversification and risk perspective, it's best to sell ESPP shares immediately after purchase. You already have a lot of your financial well-being tied up in your company, so you may not want to keep company stock as an additional concentrated position in your company.

That being said, if you have supreme confidence in your company's stock performance, you could choose to keep your ESPP shares until they gain a "qualifying disposition" for best tax treatment. Confusingly, this is not the same as short-term/long-term capital gains treatment. Qualifying disposition is achieved 2 years from the grant date AND 1 year from the purchase date (both must be satisfied).

Another consideration is that the discount you receive (due to lookback provision and/or up to 15% discount) is taxed as ordinary income. So, if you're about to retire or anticipate lower income next year, for example, you might choose to push out the sale into the lower income year (again, with the trade-off of higher risk due to concentration). The ordinary income is not taxed until the shares are sold.

In your particular case, you may want to consider at least selling all the shares that have qualifying disposition (the older ones).

Over the years, I have sold shares immediately and I have held on to them until they get qualifying disposition depending upon how much confidence I have in my company. Currently, I have several years worth of ESPP shares and plan to unload them next year after retiring this year in order to push out ordinary income to next year.

[Paradise]

Sell right away and use the money to invest according to your AA.

Would you buy your company’s stock on the open market ? If not, why hold on to the shares?

For your case since the capital gains bill would be so high, you might be stuck. I’d probably keep them and wait for a market crash to try to swap them.

[Moondawg]

I sold as soon as allowed.

+1

[BroIceCream]

I sold as soon as allowed.

+1

+1. The sale time of one of my ESPP periods also aligns with one of my company "bonus" distribution times. I use this time of the year for my annual rebalance... I use the ESPP+bonus monies to buy into my under-performing asset classes. Helps to minimize the amount of "selling" needed for rebalancing.

[Marseille07]

I usually do an X% trailing stop so I can cap the downside with unlimited upside. The X varies depending on how volatile the stock is.

[quadog]

What''s your strategy for selling your ESPP shares ?

Here’s my strategy:
1. Establish an AA that defines what max percent of my net worth can be held in company stock.
2. When max percent is exceeded, sell company stock subject to LTC gains. Only sell short term if necessary.
3. Accept the tax hit as the cost of diversification.

That’s it. I don’t want too much exposure to any one stock - including my employer’s. What percent you set is up to you.

[dcabler]

What''s your strategy for selling your ESPP shares ?

I have accumulated ESPP shares >300k during the last 5 years of my employment. I have never sold my ESPP shares. Now, I am planning to unload some to reduce risk of excessive exposure to a single stock. Luckily, my company stock has quadrupled in the last 5 years, therefore ,it has been a pleasant ride thus far.

Would love to hear your thoughts on how you manage your ESPP shares as part of your overall portfolio.

Thanks,

The day it appears in my account, it is sold. Always. Same with RSU's
Rationale:
- I stopped owning stocks years ago and moved to index funds.
- I already work for this company, which means I have to accept a certain amount of risk just keeping a job there. Why add additional risk by holding their stock?
- This is free money with a 15% discount, which amounts to a minimum nearly guaranteed 18% return before taxes ("nearly" because the price can move around a little bit between the last day of the quarter and when the shares actually appear in my account. Because it ends up being taxed at my marginal rate, I mentally just consider this a bonus on top of my salary - unlike the regular bonus at my company, this one is guaranteed each quarter and only the magnitude of it can vary.
- The proceeds are always transferred to my taxable brokerage account to purchase more of my favorite etfs.
- Rinse and repeat each quarter.

[GuyInFL]

Another consideration is that the discount you receive (due to lookback provision and/or up to 15% discount) is taxed as ordinary income.

Is this the case if the shares are donated? Where is the gain reported? W-2 or 1099?

[regularguy455]

I treat my ESPP like a short term CD. Once the gain is realized, I sell and put proceeds according to my AA.

[Aelron]

Another consideration is that the discount you receive (due to lookback provision and/or up to 15% discount) is taxed as ordinary income.

Is this the case if the shares are donated? Where is the gain reported? W-2 or 1099?

I have not tried to donate ESPP shares, so I don't know the answer to the first question.

My ESPP ordinary income gains are reported on W-2.

[AnEngineer]

Another consideration is that the discount you receive (due to lookback provision and/or up to 15% discount) is taxed as ordinary income.

Is this the case if the shares are donated? Where is the gain reported? W-2 or 1099?

I have not tried to donate ESPP shares, so I don't know the answer to the first question.

My ESPP ordinary income gains are reported on W-2.

This is likely true as long as you are with your employer, as it is not reported until you sell. If no longer with that employer, you must adjust line 1 on your 1040 yourself as well as adjust the cost basis. Note that by law your 1099 will be incorrect, but your brokerage may issue a supplemental form showing you the values that you need to know to adjust.

[AnEngineer]

...
Would you buy your company’s stock on the open market ? If not, why hold on to the shares?
...

Because you have less risk with ESPP shares than stock that you bought on the open market due to the tax treatment of the discount.

If you have a plan with a discount and lookback provision that triggered (that is, the share price went up during the offering period), then you pay less in tax if you hold onto the shares until it's a qualifying disposition. This means LTCG AND two-years since the beginning of the offering period (depends on each lot, but often at least six months before purchase and could be more). Because of this advantaged tax treatment, the stock could go down some and you could come out the same or still ahead.

If the lookback didn't trigger, there's no reason to hold.