Selling ESPP vs. RSU

Employee Stock Purchase Plan

Employee Stock Purchase Plan (ESPP) are provided by employers and allow employees to purchase company stocks at a discounted rate. The employee must enter the plan at the start of the offering period and are unable to change contribution amounts until the end of the period, when the stocks “vest”.

The amount contributed is deducted from employees salary and is tax-deferred. When the stock is sold, the employer will withhold tax on the discounted portion and employee will pay capital gains on stock price change since vesting. This means employers need to track the ESPP until it is sold because they are accountable for the tax liability.

ESPP are attractive to employees because of the discount, which is typically 10-15%. There is opportunity cost because the employee cannot invest that money elsewhere but an immediate 10-15% discount is 20-30% annual ROI (assuming two offerings per year).

Restricted Stock Units

Restricted stock units (RSU) are stocks that are given to employees as a form of compensation. Employers decide on the monetary value for compensation and they grant the number of stocks, based on current price. The stocks vest over time, based on a scheule. When they vest, the stock price may have changed, which changes the monetary value given to employee. This is what incentizes employees with teeth in the game, they want the company stock price to increase, which will increase the future value of their RSUs.

From a tax perspective, this is effectively a cash bonus at vesting time. Some of the RSU will be sold to cover tax liabilities, making RSU an after-tax compensation. If you sold the stocks immediately after vesting, there will be very little capital gains. Since this is after-tax, there is no income tax and only capital gains, making this is equivalent to a cash bonus.

You have both ESPP and RSU. Sell which first?

Once your RSU have vested, you only pay capital gains. It’s the same as buying stock immediately with your after-tax income.

ESPP are voluntary contributions to purchase company stocks at a discount. You chose to invest your own pre-tax money into this plan. Taxation is deferred until sold. The dicscount is taxed as normal income at marginal tax rates. There are still capital gains, just like RSU.

In terms of priority, you can treat RSU like other investments and sell whenever. Selling ESPP incurs income tax and should be strategically, depending on your tax situation. It can be a good time if you make less income or have more deductions for the tax year.