Employee stock purchase plan

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In the United States, an employee stock purchase plan (ESPP) is a tax-efficient means by which employees of a corporation can purchase the corporation's stock, often at a discount. For example, the discount might be 10% off on the stock's fair value market price at a certain date as determined by the plan.

Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be as much as 15% lower than the market price.

Depending when the employee sells the shares, the disposition will be classified as either qualified or not qualified. If the position is sold two years after the offering date and at least one year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years of the offering date or within one year after the purchase date the disposition will not be qualified. These positions will have different tax implications.

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