What is the maximum ESPP discount under Section 423?

15% off the lesser of the fair market value on the first day of the offering period (grant date) or the last day (purchase date). Plans can offer less; 15% is the statutory ceiling, not a guaranteed rate.

What is the $25,000 ESPP limit measuring?

The value of stock you can purchase in a calendar year, valued at the undiscounted fair market value on the first day of the offering period — not the discounted price you actually pay and not the shares' later value.

What makes a disposition qualifying vs. disqualifying?

Qualifying: shares held more than 2 years from the grant (offering) date AND more than 1 year from the purchase date. Disqualifying: either test is missed. The label only changes how the sale is taxed, not whether you can sell.

Does a disqualifying disposition mean I did something wrong?

No. It just means you sold before both holding-period tests were met, which is common and sometimes deliberate (for example, an immediate sell-to-cover). It shifts more of the gain into ordinary income and can trigger reporting the employer doesn't withhold on.

ESPP Plan Terms Cheat Table (Section 423)

Section 423 caps the discount at 15% off the lower of the grant-date or purchase-date price, caps annual purchases at $25,000 of grant-date value, and splits every sale into a qualifying or disqualifying disposition depending on two holding-period tests.

A tax-qualified ESPP under Internal Revenue Code Section 423 gets favorable treatment only if the plan and the sale both meet statutory rules. The three numbers below are set by the Code itself, not by any one employer's plan design — a company can be more conservative (a 10% discount, no look-back) but cannot exceed these ceilings and keep Section 423 status. This page is EquityDue's data layer for the ESPP disposition compare tool.

Section 423 statutory limits
Term	Statutory rule
Maximum discount	15% off the lesser of FMV on the offering (grant) date or FMV on the purchase date
Look-back feature	Optional — lets the plan price off whichever of the two dates is lower; not every plan includes it
Annual purchase limit	$25,000 of stock per calendar year, valued at the undiscounted FMV on the first day of the offering period
Offering period	Set by the plan; commonly 6 or 24 months, often split into shorter purchase periods

Verified as of July 13, 2026. Source: 26 U.S. Code §423, Employee stock purchase plans.

Qualifying vs. disqualifying disposition

The same shares can be taxed two different ways depending entirely on how long you hold them after purchase — the plan doesn't change, only the sale timing does.

Holding-period tests
Disposition	Requires	Ordinary income recognized
Qualifying	Sold more than 2 years after the grant date AND more than 1 year after the purchase date	Lesser of (a) 15% of FMV at grant, or (b) actual gain (sale price minus purchase price). Remainder is long-term capital gain.
Disqualifying	Either test missed — sold within 2 years of grant or within 1 year of purchase	FMV at purchase minus purchase price, in full, as ordinary income (usually not on the W-2 withholding, only reported income). Remaining gain or loss from purchase-date FMV to sale price is short- or long-term capital gain/loss depending on how long the shares were held after purchase.

Verified as of July 13, 2026. Source: 26 U.S. Code §423; ordinary-income mechanics per IRS guidance on statutory stock options.

Worked example

Grant-date FMV $40, purchase-date FMV $50, 15% discount, look-back enabled — the plan prices off the lower of the two dates, so the purchase price is 85% of $40 = $34.

Sell at $70, held >2yr from grant and >1yr from purchase (qualifying): ordinary income = lesser of 15% × $40 = $6, or actual gain $70 − $34 = $36 → $6 ordinary income, remaining $30 is long-term capital gain.
Sell at $70, held only 6 months after purchase (disqualifying): ordinary income = $50 − $34 = $16, remaining $20 ($70 − $50) is short-term capital gain since it sold within a year of purchase.

The $16 vs. $6 difference is the entire reason the two labels matter — a disqualifying sale converts $10 more of the same $36 profit from capital gain into ordinary income. See the disposition compare tool to run your own numbers, and the holding-period day counter to check which test a planned sale date would satisfy.

Plan terms vary by employer within these statutory ceilings — confirm your own plan's discount, look-back, and offering-period length in your plan document. This page is general reference information, not tax advice.

Common questions

What is the maximum ESPP discount under Section 423?: 15% off the lesser of the fair market value on the first day of the offering period (grant date) or the last day (purchase date). Plans can offer less; 15% is the statutory ceiling, not a guaranteed rate.
What is the $25,000 ESPP limit measuring?: The value of stock you can purchase in a calendar year, valued at the undiscounted fair market value on the first day of the offering period — not the discounted price you actually pay and not the shares' later value.
What makes a disposition qualifying vs. disqualifying?: Qualifying: shares held more than 2 years from the grant (offering) date AND more than 1 year from the purchase date. Disqualifying: either test is missed. The label only changes how the sale is taxed, not whether you can sell.
Does a disqualifying disposition mean I did something wrong?: No. It just means you sold before both holding-period tests were met, which is common and sometimes deliberate (for example, an immediate sell-to-cover). It shifts more of the gain into ordinary income and can trigger reporting the employer doesn't withhold on.