Hey all. My employer offers many stock benefits through RSU, ESPP, and options. I try to max out my ESPP and as a result my non retirement holdings are heavily skewed towards my employer’s stock. I’m trying to diversify and not worry about timing the market, but what do I need to consider when it comes to timing sales of the stock to avoid wash sales? Currently we are down from the highs a 2 years ago. Should I worry about wash sales relative to timing of various acquisition dates? What am I losing by making a wash sale? Thanks.
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I don’t know the rules about wash sales but surely you could just buy S&P 500 index funds to truly diversify. Only thing to consider for ESPP is that you get taxed at the income tax rate (probably higher) if you sell ESPP funds you received within 12 months, and you get taxed as capital gains (probably lower) for anything held longer. So sell the longer-held stock first.
That’s what I do. But if you sell at a loss within x days of acquiring more of the security, I think you lose tax benefits of the loss. But I am not sure if that is a significant worry or if it should prevent or delay when I choose to diversify into index funds.
Not a CPA, this is my understanding of the wash sale.
Let’s say you buy your company’s stock is currently trading at $100. You buy some shares at a discount, for $85, and hold them for a year, to leverage long term capital gains.
It is now December 2024, it turns out the stock has dropped in value and is now worth $80. You want to buy more to take advantage of the discount, and because you think it is likely underpriced. However you are worried that buying more will give you too much exposure to this single stock. A move you could do is sell the stock you owned, for $80, and buy back some stock, for $68 (since you get a discount). You could buy potentially the same amount you disposed of, ending up with the same value dollar-wise, but more stocks. Or maybe you have shares that are automatically bought through a pre-set plan.
Now this is when you trigger the wash sale. The wash sale rule doesn’t say you can’t do this, but it does say that if you do this, you cannot claim the loss on your taxes (in this case, the $5 loss arising from selling stock at $80 that you acquired for $85). What this means is that this loss will be added back to the cost basis of the new stocks you purchased for $68, giving you a cost basis of $73, and an unrealized gain of $7, as opposed to an unrealized gain of $12. So even though you can’t claim the loss now, your realized profit later on will be $5 less, and you will eventually get the tax benefit. (I am looking at IRS publication 550, wash sale section).
Basically, you can buy and sell all you want (from the IRS’ point of view. Your employer might have restrictions on holding periods and so forth), you just can’t use that strategy to lower your tax bill artificially.
On a side note, diversifying away from your employer’s stock can be good, because otherwise you double down on your risk. If your company is doing well, your portfolio increases, and your job is likely safe. If your company is not doing too well, you may lose your job at the same time as your portfolio taking a significant dip
Normally I sell all my ESPP stock as quick as possible. Several years ago my company did not have a mandatory holding period, so I always sold it immediately. I had to pay a higher tax rate on the 15% discount, but it was a guaranteed return with no risk.
Now we have a one year required holding period, which is great for lowering taxes, but adds volatility risk. Last year our stock started the year overpriced, then dropped below what I considered a fair price. I stopped selling stock at that point to hold for a fair price. We’re just now getting close to a reasonable price, but now I’m holding way too much company stock (I’ve kept buying my maximum along the way). I’m slowly starting to sell and hope to get back to my old practice of always selling by the end of the year.
On the bright side, I’ve added a little extra income along the way by selling covered calls against the shares I’m holding. In the last year I’ve made more from that than dividends on the same shares and have offset the loss on the shares I bought at the peak of the 2022 market. I would still rather sell without a holding period though.
Similar boat for me re holding period. As long as the losses of ESPP value are tracking the drops of s&p500, does it make sense to sell at a loss and buy since you will still be acquiring a similar volume of index?
I think where I worry more about the loss isn’t on options… If we are in the red relative to the grant price I can’t exercise at all with my employer’s plan. Also, can only exercise options by selling stock from the option; can’t pay out of pocket to acquire full shares.
Good point on selling at a loss and reallocating. I would have been willing to do that if I thought I had a better option in mind, but I actually felt very good about the potential 1-2 year price increase opportunity with my employer’s stock, so I just held. At this point I’m neutral on the stock price, so I’m starting to reduce my holdings, but mostly by selling covered calls with the expectation that some will get exercised.
I’m in the same place with stock option grants, the last 2-3 years of grants are all worthless at the moment and probably will be for a long time based on how overpriced the shares were in 2021/2022. The timing was particularly bad because we get our grants in Mar/Apr and our price was sky high at that time in 2022, our stock dropped like a rock through 2022, but got back to almost fair value by Mar 2023, so I didn’t get any options at the low prices of late 2023.
I hold mine for 1 year then sell at the current price no matter what, then buy S&P 500.
My logic is that while my company gives me a 15% discount and pays a 4% dividend so long as the company does not lose more than roughly 19% a year I come out ahead. That said, I have a rolling $25,000 in stock and my job with that company so I am eager to diversify.