Employee Stock Purchase Plan (Section 423 Qualified) tax

An employee stock purchase plan gives you a discount, and how long you hold decides whether that discount is taxed as ordinary income or as capital gain. Two holding periods have to be cleared, not one.

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Two taxable events, not one Equity compensation creates two taxable events: (1) ordinary income when shares vest or options are exercised, (2) capital gain/loss when shares are sold. Misunderstanding this two-layer structure is the most expensive equity tax mistake.

Two holding periods, both of which have to clear

A Section 423 plan lets you buy at a discount of up to 15%, with an annual purchase limit of $25,000. Whether the discount is taxed as ordinary income or as capital gain depends on clearing BOTH periods: more than more than 2 years from the offering date AND more than more than 1 year from the purchase date. Missing either makes it a disqualifying disposition.

Section 423 qualified ESPP shares: NO FICA on either qualifying or disqualifying dispositions. Non-qualified ESPPs ARE subject to FICA at purchase.

The other equity instruments

What this covers

Federal treatment for the 2026 tax year, from the verified dataset.
Single filer taking the standard deduction in the worked figures.
Equity income stacks on top of salary, so it fills your highest brackets, the figures reflect that rather than taxing it in isolation.
Informational only, not tax advice. Equity decisions are worth a professional's time.