ESPP lookback & discount

The discount is the percentage the plan states, at most 15% under a US Section 423 plan. The lookback decides which price the percentage comes off. When the stock has risen since the offering started, the price is 85% of the old, lower price, and the gap to the purchase-day price is wider than 15%. When the stock has fallen, the lookback does nothing and the price is 85% of the purchase-day price.

The two are confused because both are called “the discount”. The plan's discount is fixed. The discount captured on a given purchase, the purchase-day price minus what was paid, moves with the stock, and with a lookback it is at least the plan's discount.

For tax the discount is measured differently again. On a qualifying disposition the ordinary income is capped at the plan's discount applied to the grant-date price: when the purchase price was not fixed on the grant date, it is figured as if the purchase had happened that day. On a disqualifying disposition it is the purchase-day price minus the price paid.

An offering starts with the stock at $20, under a plan that caps the shares each employee may buy in the offering, so that day is the grant date. On the purchase day the stock is at $25. With a 15% discount and a lookback, the price is 85% of the lower figure, $17. The $3,400 withheld over the period buys 200 shares, worth $5,000 that day.

The discount captured is $8 a share, 32% of the purchase-day price, or $1,600 on the lot. Without the lookback the price is $21.25 and the same $3,400 buys 160 shares.

FMV at offering start

$20.00

FMV on the purchase day

$25.00

Lower of the two × 85%

$17.00

Discount captured, per share

$8.00

On 200 shares

$1,600

The price paid is the lot's cost basis, and the gap above it is where the tax is. On the lot above, a qualifying sale treats at most $3 a share as ordinary income, 15% of the $20 grant-date price, and the rest of the gain as long-term capital gain. A disqualifying sale treats the full $8 as ordinary income.

The $25,000 annual cap on a Section 423 plan counts shares times the grant-date price, so the 200 shares above use $4,000 of it, not the $3,400 paid, and the extra shares a lookback buys use more of the cap.

In Taiga Finance an ESPP's grant record shows the discount as one line, “15% with lookback”, and the FMV at offering start the price was measured from. Its purchase history lists Paid / sh and FMV then for each lot, and the grant's header carries Discount captured, with the line “purchase-day FMV minus price paid”.

A future purchase is projected at today's price with the lookback applied, and the sale planner uses the offering-start FMV to cap the ordinary income on a qualifying sale.