What an ESPP is
An employee stock purchase plan lets you buy your employer's stock through payroll deductions, usually at a discount. You pick a percentage of pay (many plans cap it at 15%). The money builds up during an offering period, and on the purchase date the plan buys shares for you. Plans that follow Section 423 of the tax code can discount the price by at most 15%.
The discount, as a return
A 15% discount is bigger than it sounds. With no lookback, you pay 85% of the purchase-date price. $42.50 buys a share worth $50.00, and 50 ÷ 42.50 − 1 = 17.65%. That's the instant gain on the purchase date, before the stock moves at all. The general version is 1 ÷ 0.85 − 1.
The lookback
Some plans add a lookback: the discount applies to the lower of the price at the start of the offering and the price on the purchase date. Say the stock was $40 at the start and $50 on the purchase date. You pay 85% of $40, which is $34, for a share worth $50. That's 50 ÷ 34 − 1 = 47.06%. If the price falls during the offering, the lookback doesn't help, and you get 15% off the lower purchase-date price.
The $25,000 limit
The tax code limits each employee to $25,000 of stock per calendar year. It's measured at the fair market value on the offering start date (the grant date), not at the discounted price you pay. At a $40 start price, that's 625 shares a year. With a 15% discount and a lookback, those 625 shares cost $21,250. Contributions beyond what the limit allows are normally refunded. This calculator caps the shares and shows a warning when you hit it.
Whole shares
Most plans buy whole shares only and carry the leftover cash to the next purchase or refund it. That's the default here. If your plan buys fractional shares, turn that option on. The percentages don't change, only the share count and the leftover cash.
Taxes
The discount is taxed as ordinary income, reported as wages. How much depends on when you sell. A qualifying disposition needs more than 2 years from the offering date and more than 1 year from the purchase date. Then the wage part is the lesser of the discount figured at the offering-start price or your actual gain, and the rest is a long-term capital gain. Sell sooner and it's a disqualifying disposition: the whole spread on the purchase date (the purchase-date price minus what you paid) counts as wages, even if the stock has fallen since. Your cost basis goes up by that amount, so a later drop shows up as a capital loss. Form 3922 from your employer lists the prices and dates you need.
Risk
The instant gain only exists on the purchase date. After that, you own one company's stock, and it can fall before you sell. It's also concentration risk. Your job and your savings then depend on the same company, and a bad year can hit both at once. The calculator's sale price is there to test that. Try a sale price below the purchase price and see how fast the discount disappears.
Sources
- IRS Publication 525: Taxable and Nontaxable Income (Employee stock purchase plan)
- IRS: Instructions for Forms 3921 and 3922
- 26 U.S.C. §423 (the $25,000 limit is §423(b)(8); the 15% discount cap is §423(b)(6))
Last reviewed: Sep 28, 2026