Selling Stocks

Misanthropic

I have a stock purchase plan at work, where I can choose a percentage amount of my paycheck to be withheld for six months and at the end of those six months all the accrued money is used to purchase stock at 85% of market value.

At that point it goes into an etrade account and I can do with it what I will.

My question is, lets say I sell it - whatever the difference is between what I got it at and what I'm selling it for is counted as taxable income when I sell it, correct?

So lets say I had ten stocks at $85 a share, and I sell those ten stocks at $100 a share. There is a $150 dollar difference there. So that is counted as income and I should pay taxes on that, right? If yes, how is that counted?

I've also read if I sell it inside a two year window from the day I got them it's different than if I wait two years. Is that true?

strakha_7

In Canada you pay capital gains tax at half the marginal tax rate you are in. So if you were in the 30% bracket, you'd pay 15% tax on any capital gains (i.e. stock profits, not including dividends). I'm sure the USA has soemthing similar.

Ask your HR department about the two year thing.

EggyToast

Yep, you pay taxes on gains. You can also claim a deduction on losses, if that were to happen, but yeah. There should be a line on your form for income from selling stocks/bonds, when this were to occur.

Whether you pay taxes on the discount you receive is a question for a broker or your HR department. Most stock option stuff I've studied doesn't deal with the taxes, but rather the simple logistics of how options work.

Project Mayhem

Sounds exactly like my stock plan with my employer... but you're sure you can do whatever you want with it right after the six months? I have to hold onto it for a year or two after purchasing it.

MrBlue

I just went though this with my taxes. At least for me, the differenece between the discount and the tradig price at the time of the purchace was already counted as income and my employer already withheld taxes for that gain. Just check your W2 to see if it shows up as other income in box 14.


So, assuming your employer works the same as mine:
Iif the trading price was $100 a share and you paid $85 at the time of the purchase, you would have already had taxes withheld from your paycheck to cover the $15 a share gain.

Any future sale of stock would have a cost basis of $100 a share. i.e You only need to pay additional income taxes if you sell the stock at a value more that $100 a share.

stratslinger

Another thing to remember (I think this still applies in the US - could be wrong, it's been a couple years since I last had to calculate capital gains) is that there can be a difference between long term and short term capital gains.

Basically, if you sell a stock within 2 years of it's purchase date, you get tagged with short term capital gains. If you hold the stock for at least 2 years before selling, you get tagged with long term capital gains. The percentage is smaller for long-term gains, though the gain itself (assuming an upward trend in the value of your stock) will be larger, possibly making the difference between the two rates a wash...

Djeet

Has there been some change to the US tax code where "long term" is now two-year? The short/long term divide has always been 1 year. Short term gains you get taxed at your marginal income tax rate, long term gains from stock sale are usually taxed at 15% (or 0-5% for individuals in the lowest tax brackets).

Edit: The "two year" thing sounds like a requirement to hold the stock for a period before selling. If your stock purchase plan has such a requirement you should find out what tax or penalties you may owe if you sell early.

Ganluan

I always thought it was 2 years myself - or is that a separate requirement for home sales? I know plenty of investors who try to keep a home for 2 years before selling to avoid the full capital gain hit.

Djeet

If you sell your primary residence after owning it less than 12 months it's short term cap gains, more than 1 year it's long term capital gains. However there's also a possibility you can exclude upto $250K or $500K (married) of gains on the sale of your primary residence.

To qualify for the capital gains exclusion on the sale of your primary residence you must've owned it at least 2 years. If you've rented it out (making it something of an investment property) it must have been your primary residence for at least 2 of the past 5 years.

Also gains made in the sale of depreciated real estate as well as collectibles and "qualified small business stock" (1, 2) are taxed at a different rate from stock sales.