The Tax Treatment of a Sale of Employee Stock Share Purchases
Employees often acquire company stock through stock grants or employee stock options, and some buy company stock on the open market. While granting stock or options carries special tax considerations for both the employee and the company, purchasing stock on the market does not carry any tax burden and once the employee owns the stock any profits are treated as normal capital gains.
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Purchasing on the Market
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Employees can purchase company stock on the open market through their broker. Brokers charge fees for placing orders, but the Internal Revenue Service does not tax any purchases of stock. The IRS only wants reporting and tax dollars for realized profits or losses; you pay taxes when you sell stock, not when you buy it.
Employee Stock Options
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If an employee uses employee stock options to purchase company stock, both the company and the employee must report the purchase. Stock options are contracts giving the holder the right to purchase stock at a specified rate by a certain date. If the employee uses non-qualified options (in IRS terms, non-statutory options), the employee must report the difference between the option price and the market price as extra income for that tax year. The company must report the difference as income on the employee's W-2 form and withhold payroll taxes.
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Stock Grants
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If a company gives an employee a stock grant (essentially just giving the employee shares of stock) the company must report the market value of the shares of stock as extra income and withhold payroll taxes. The employee owes income tax on the grant for the tax year in which the grant was received, even if the employee never received any cash from selling the shares.
Capital Gains Tax
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Once an employee owns company stock, the IRS considers the stock to be an investment like any other, regardless of the conditions under which the employee purchased the shares. When the employee sells the shares, any profit will be taxed as a capital gain. If the employee holds the shares for longer than 365 days, the IRS charges a 15 percent capital gains tax, though if the employee sells the shares after less than 365 days, the IRS taxes the profits at the employee's income tax rate, though the gains do not count as income.
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References
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