[kyteland]

I do it the opposite way myself. If the stock is increasing there's a nice tax bonus on most ESPP plans by holding it 2 years from the start of the plan. If you have a lookback provision, by holding 2 years you shift more of your gains from ordinary income into long term capital gains (LTCG).

So a common example is a 6 month buying period with a lookback and a 15% purchase discount. Say the stock was $10 at the start of the period and ended at $12. The lookback period takes the lower of those two for purchase. A common misconception is that it is the lowest price anywhere in the 6 month purchase period, but no it's just the start and end values.

So if you sold right away you'd end up buying at min($10,$12)x85% = $8.50. You'd sell at $12 (so that's your cost basis) and have $3.50 in ordinary income tax per share.

Now say you waited 1 year to get the LTCG. In that time it went up to $13 a share. You sell and now you have $4.50 in gains. But you're still before the 2 year period so your cost basis is $12 and the split is $3.50 in ordinary income and $1 in LTCG.

Now say you waited 2 years. This is where the tax advantage happens. Your cost basis is adjusted to the min($10,$12) value. Even if the price is still at $13 when you sell your tax split is $1.50 ordinary income and $3 LTCG, because your new cost basis is $10.

Keep in mind when the stock declines over the purchase period this advantage completely evaporates.

Another thing to note on the timing. The clock starts ticking on LTCG when the stock is purchased into your account. But for the tax benefit is it from the start of the plan, when they start taking money out of your paycheck. Where I work the plan is annual, with purchases every 6 months. So on the first purchase of the period 6 months have already elapsed and I need to wait 18 months to get the tax benefit. On the second purchase 12 months have passed so I only need to wait 12 more months, which aligns with the LTCG period.