When most of my financial statements arrived in the mail late January, I purchased Turbo Tax and started filling out most of the forms. My taxes are pretty straightforward except for the sections concerning stock options and Employee Stock Purchase Plans. While working for Metrowerks/Motorola/Freescale, I took part in the ESPP program which allowed me to essentially buy the company stock at a 15% discount (possibly greater under certain market conditions) twice a year. In order to do this, the company set me up with a Smith Barney brokerage account to handle the transactions.
As you might have guessed from the title of this post, I'm not too fond of Smith Barney right now. Figuring out taxes on ESPP shares and reinvested dividends is a total pain in the ass. There are several things which they could do differently that would make it easier for me.
First of all, when you elect to sell shares in your account, you can either sell a whole number of shares, or all of your shares. Well I never wanted to sell everything, just shares from particular lots so that I can control my returns, hold times, etc. I guess Smith Barney doesn't realize (more appropriately they just don't care) that each lot is hardly ever comprised of a whole number of shares. As an example, let's say I purchased 12.3456 shares back in 2002 and then wanted to sell that lot in 2004 (but not any of the other lots purchased at different times). I can only sell 12.0000 of them, leaving me with 0.3456 shares in my account from that lot. Fast-forward to 2006 and I decide it's time to sell all of my remaining shares. Not only am I selling the 0.3456 shares from this example, but also many other fractional shares left over from other lots, and reinvested dividends that have accumulated over the whole time period. Figuring out the cost basis was bad enough when I originally sold the 12 shares, but now when it's especially difficult when mixing all of these small share transactions. Why, if I can purchase a fractional amount of shares can I not sell a fractional amount? At least give me another option which is to be able to sell all of a particular lot, even if it contains fractional shares.
Another thing which would make things much easier is for Smith Barney to provide me with a statement with all of my cost basis information calculated for me. When I sold my shares, I told them which lots I was selling. They know the offering period stock prices, how much I paid for them, what I sold them for, and so on. Yet they don't do that extra step, leaving me to agonize over how all this crap is to be determined. Sure, they sent me a print out of every transaction I've made, but peppered throughout the ESPP transactions are many reinvested dividends which are taxed with different rules.
That leads me to another item, not necessarily their fault, but something I would do differently. If I ever do get the chance to participate in another ESPP, I will elect not to have my dividends reinvested. A number of people flip the shares as soon as they hit their account. I will probably use that technique too, even though the tax hit is greater.
Are these problems specific to Smith Barney? I honestly don't know but I doubt it. Thankfully I have now depleted all individually held stocks from my portfolio. I am a big proponent of investing in mutual funds. I feel much more confident placing my money in the hands of a professional to make decisions that I am completely unqualified to make. While an ESPP program can be nice and give you a good return on your money, be sure to think about the headaches it can cause when trying to figure out your taxes.
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