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How is an ESPP sale taxed depending on how long I hold?

Answer

For a qualified Section 423 ESPP, the tax depends on whether your sale is qualifying or disqualifying. A qualifying disposition requires holding more than two years from the offering start and more than one year from purchase; then only the lesser of the actual gain or the original discount is ordinary income, and the rest is long-term capital gain. A disqualifying disposition (selling sooner) makes the full discount at purchase ordinary income, with remaining gain capital. Many people sell quickly anyway to bank the ~15% discount and diversify, accepting the disqualifying treatment – the extra ordinary tax is small versus the certainty of the gain. Watch that your broker often reports a cost basis that omits the discount already taxed as wages; adjust it so you don't pay twice.

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