3 Common ESPP Mistakes That Cost You Money (and How to Avoid Them)

If you work at a public company, there’s a good chance you have access to an Employee Stock Purchase Plan (ESPP) — and if you're not using it (or using it wrong), you're probably leaving money on the table.

While RSUs are getting a lot of attention lately, let’s not sleep on ESPPs. They’re one of the few benefits that can give you guaranteed upside — if you play it right.

But here’s the catch: ESPPs come with their own set of rules, timelines, and tax traps. Miss one, and you could pay more in taxes than you need to.

Let’s break down the three most common ESPP mistakes — and how to avoid them.

1. Selling Too Soon and Paying the Price in Taxes

Here’s what most people don’t realize: how long you hold your ESPP shares matters — a lot.

Want to qualify for long-term capital gains rates? It’s not just about holding shares for a year like it is with other stocks.

ESPPs have an extra rule:

To get favorable tax treatment, you need to meet both of these holding periods:

• At least 1 year from the purchase date

• At least 2 years from the offering (grant) date

If you sell before hitting both of those marks, it’s considered a disqualifying disposition — and that capital gain you received? It gets taxed as ordinary income, not capital gains rates.

📌 Real-World Example:

Let’s say your company offers a 15% discount and you purchase shares at $85 when the market price is $100. Six months later you sell at $120.

If you sell before meeting both holding periods:

1. The $20 gain  =  Sales price $120 - adjusted cost basis of $100 (purchase price $85 + $15 discount reported on W2) is taxed as ordinary income
2. Note that the $15 discount will always be taxed at your ordinary income rate as it is reported as compensation on your W2.

Hold those shares long enough, and only the discount portion gets taxed as ordinary income — the rest of your gain may be taxed at the lower long-term capital gains rate (15% or 20% depending on your income level).

✅ What to Do:

• Know your offering date and purchase date for each share batch.

• Before selling, confirm you’ve hit both time milestones.

• Work with a tax advisor who understands equity compensation and can map out a sell strategy that balances cash needs with smart tax timing.

2. Self-Filing and Paying Tax Twice

A common and costly mistake? Assuming your brokerage or W-2 handles all the tax reporting for you. Unfortunately, they usually don’t — and you could end up paying tax twice on the same income.

Here’s how it happens:

When you buy ESPP shares at a discount, that discount is considered income. Your employer will include it in your W-2, and you’ll pay income tax on it that year.

Later, when you sell those shares, your cost basis (what you paid for them) should include both:

• Your actual purchase price

• The discount amount that was taxed as income on your W-2

But here’s the kicker: most brokerages only report your purchase price — not the full cost basis that includes the discount.

So what happens?

If you don’t adjust the basis on your tax return, the IRS sees a bigger capital gain than what you actually earned — and you get taxed again on that already-taxed income.

Pro Tip:

Keep your Form 3922 for each ESPP purchase. It shows the offering date, purchase date, fair market value, and purchase price — all info you need to calculate the correct cost basis.

✅ What to Do:

• Track your purchase price, discount, and sale price for every ESPP transaction.  

• Save your Form 3922s — your CPA will need these to report the sale accurately.

• Don’t trust your brokerage to get it right — always review your 1099-B with your tax advisor.

🧾 Bonus: Some brokerages include supplemental info showing adjusted basis, but it’s often buried or inconsistent. Double-check anyway.

3. Skipping the Plan Altogether Because It Feels “Confusing”

Let’s be real: ESPPs can feel confusing. But skipping them entirely? That’s usually the most expensive move of all.

Most plans offer:

• A 15% discount

• A lookback provision (you get to buy shares at the lower price between the offering date and purchase date)

Even if you sell immediately, you’re locking in instant gains — minus taxes, of course.

✅ What to Do:

• If your ESPP has a discount and lookback, it’s almost always worth participating.

• Even without holding for tax-favored treatment, you can:

  • Capture the discount

  • Sell immediately

  • Reinvest the proceeds somewhere else

Think of it as a built-in bonus opportunity every six months.

💼 Bonus Tip: Coordinate Your Stock Plan Strategy

If you’re receiving RSUs, ESPPs, ISOs, bonuses, or a promotion all in the same year — don’t manage them in silos.

The tax impact can stack up fast.

A tax-savvy advisor can help you:

• Optimize withholding to avoid underpayment penalties

• Time your ESPP sales and RSU vesting

• Make smart decisions about when to sell, hold, or diversify

• Avoid surprise tax bills and uncover tax-saving opportunities

Final Thought: Don’t Let Taxes Eat Your Gains

ESPPs are a powerful benefit — but only if you use them wisely.
The difference between “free money” and “extra tax bill” often comes down to timing, tracking, and working with someone who knows the rules.

Not sure what to do with your ESPP shares?
Let’s make a plan to help you keep more of what you earn — and avoid tax-time surprises. Contact me here, and let’s map it out.