The shares you purchase through a qualified ESPP can be eligible for beneficial tax treatment. Your shares can “qualify” for this special tax treatment or be considered “disqualified” depending upon when you sell and if certain holding periods have been met. This special treatment will determine whether the income from your sale is taxed at ordinary income rates or at the more favorable capital gains rates.
To receive beneficial tax treatment, the purchased shares must be held for:
More than one year from the purchase date. This holding period requirement also meets the holding period required for long-term capital gains.
More than two years from the offering date (the date the offering period begins).
When shares are sold after meeting both holding periods, it is considered a qualified disposition and will receive favorable long-term capital gains tax treatment on a portion of the gains.
When shares are sold before meeting both holding periods, it is considered a disqualifying disposition and the shares will not receive special tax treatment. You will be required to report ordinary income equal to the difference between the fair market value of the stock at the purchase date and the actual purchase price. To learn more, review ESPP: Qualifying and Disqualifying Dispositions (PDF).