Avoiding double taxation on ESPPs

Ah, tax season. Every year, it seems like I'm affected by some new little trick or trap. This year it's my company's ESPP—employee stock purchase plan. It's an incentive provided by the employer to induce employees to purchase stock of the company itself. An example ESPP plan might let its employees put up to 10% of each paycheck directly into company stock, bought at a 10% discount.

One interesting aspect of these plans is the complex taxation mechanisms surrounding it. In the specific case that you sell the purchased stock within a year after acquiring it, you might end up being double taxed on some of the money you earn! Here's how:

Bill is an employee of the infamous XYZ Corp. He sets aside 10% of his $4,500 monthly paycheck, or $450, to participate in the company's ESPP. On the day the shares are purchased (e.g., March 31), the stock is trading at a price of $10. After the 10% discount, employees are buying at $9. Bill's $450 goes to purchase 50 shares of XYZ corp. (My, what nice round numbers!)

Here, we must take a brief aside into the Land of Arcane Calculations. For tax purposes, we must compute just how much of a benefit the ESPP gave the employee, or the "bargain element". This is the difference between the fair market value (FMV) of the stocks at purchase (50 * $10 = $500) and the actual price paid for them ($450). For Bill, the bargain element is $50. (This will be important later, like next February.)

All right, so now Bill holds the XYZ shares for six months, during which time XYZ Corp. does great, and the share price skyrockets to $12. (Whoo!) Bills sells his 50 shares at a healthy gain, for $600. All's well, right? (Side note: The IRS argot calls any such sale after less than a year a "disqualifying disposition".)

Early next year, Bill starts receiving his tax reporting forms. First comes the W-2. As per the IRS guidelines, XYZ Corp. monitors the sale of the shares given in its ESPP plan, and it includes the bargain element of the sale (that $50 we computed earlier) as part of his gross income. (If XYZ is like my employer, it's not itemized, either, so Bill will have to be diligent to notice it.)

Next, Bill gets a 1099-B statement from his brokerage. The brokerage reports that since Bill bought 50 shares at $9, then sold them at $12 within a year, he has $150 of short-term gains.

Okay, notice the sneaky double taxation? The bargain element has been included as income on both the W-2 and the brokerage statement. (Also, note that if this is a semi-monthly occurrence, the double-reported income for the year will total $1,200—no small chunk of change.)

After introducing the problem, I won't endeavor to solve it here, as it's already been done excellently by Fairmark.com(*). But if you participate in an ESPP (and if you can, you should), be aware of this little taxation trap.

(*) Short version: alter the basis reported by the brokerage to reflect FMV, then tell the IRS that you did so.

Dancing in the marketplace

From a book I recently read*:

"It is easier to find employment as a data processor than as a dancer, even though being a dancer offers more venues for self-awareness and self-expression."

I won't dispute either assertion of this sentence, because I think they're both true. However, the author attributes this fact to a failing of society, or possibly a conspiracy to deprive mankind of its innate rights of self-expression. This I refuse to believe.

Instead, this is probably a result of immutable market forces (i.e., supply and demand).

First of all, demand for dancers is not exceptionally high. Even if everyone in the world craved dancing performances—and I have reasonable evidence that this is not the case—one dancer can entertain a whole bunch of people. Because of the ease of scaling here, one ballet theater goes a long way in a community.

Next, the supply of dancers is a bit larger. Why? Because of the very attributes of dancing cited above, viz., that it "offers more venues for self-awareness and self-expression." Honestly, if you could choose data processing for a living, or dancing for the same salary, which would you choose? I think for most folks, the added benefits of dancing would tip the balance.

Market forces have only one way to make up for this imbalance: money. By lowering the employment opportunities and money-making potential of dancers, the market reaches an equilibrium, in which just enough people leave dancing for data-processing jobs because the math doesn't add up.

The people who are left in dancing are generally, therefore, of two kinds:

1. Top-flight professional dancers who can make enough money to make it worth their while. This group is highly competitive, and so members sacrifice their entire lives to maintain their positions. There's just not much room at the top—after all, how many professional dancers does it take to entertain the world? (No, that's not a joke.)

2. Amateur dancers who "follow their hearts" and dance despite the lack of substantial remunerative emoluments. These people also sacrifice, but instead of sacrificing time and energy, they sacrifice money and material comforts.

Unfortunately, many performing arts have this imbalance. To be in the high-earning group, you need to be exceptional. To be in the amateur group, you need a day job.

The internet is disrupting this uneasy balance a little by providing the opportunity to perform to a smaller group and still be heard, but we're still a long way off from an "everyone dancing" utopia.

(* The Art of Effortless Living, by Ingrid Bacci, if you must know; but it wasn't really that great a book. )

I-1183

Bankrolled by Costco.

Potential fiasco.

A mí me da asco.

Tinnitus and Me

Over the weekend, in the process of getting over a pretty nasty head cold, I experienced some temporary tinnitus: As I lay in bed, I could distinctly hear ringing in my left ear. Since it somewhat impeded my going to sleep, and since I'm curious about auditory matters, I took the time to examine and reflect on the phenomenon.

It turns out that my tinnitus (at least that temporary bout; it's gone as I write this) sounds like a hazy pitch somewhere around F# and G (both seemed to fit within it), accompanied by a more defined, though quick and irregular, 'beeping' at the just-lower E♭. (This last honestly sounded just like a telegraph; if I knew Morse code better, I might have got direct messages from my auditory cortex!)

Interestingly, the American Association of Audiology found that over a 195-patient sample, the average pitch was 4968 Hz, which sounds to me about the same as the E♭ I heard last night. (At A/440 concert pitch and equal temperament, that E♭ should technically be at 4978Hz. However, that discrepancy is probably outside the resolution of my pitch accuracy.)

It was way cool having temporary tinnitus, but I'll go to sleep quicker tonight.

From the annals of history...

I've been reading Vance Packard's prescient The Pyramid Climbers, published 1964. From page 108:

While executives may enjoy the kudos of high status..., to be successful in today's world, they also must be mindful of their role as goodwill ambassadors for the company. They must bear in mind that if they seem to drift too far from looking like and acting like the common man, radicals may arise, as they did in the thirties, with cries of "Down with the Economic Royalists!"

I think this may indeed be a catalyst for the current grumpiness toward big business, though I'm not quite sure who did the drifting: did company execs' lives (and bonuses) get worse at "acting like the common man", or is it that the "common man" isn't doing as well? Maybe a little of both.

Stratego, Plugged

This week, I was at the local thrift store when I discovered an old friend: a functional copy of Electronic Stratego! (He was on sale for a buck.) In case you have forgotten how this lovely contraption looks, or if you've never met one, here's a brief sample: (Warning! 80's nostalgia ahead!)

Some of you may be asking, "What is that?!", to which I reply, "It's like Stratego! By Milton Bradley! A classic game of strategy and... um... 'go'? Look it up!"

So, now some of you are probably asking, "Right... so... how's it different than normal Stratego?" Well. Let me tell you how it's different from the vanilla edition.

To start off, the scale is a little different. It's got an 8x10 grid (instead of 10x10), and only 24 pieces (instead of the usual 40).

More importantly, the electronic aspect opens up a lot more functionality. There are three major variations in gameplay that result from having Electronic Stratego instead of "plain-ol'" Stratego:

One: Hidden bombs. The little compartments on either player's side of the board let players place bombs under their pieces, and they activate only when stepped on by enemy players. (Unless your board's malfunctioning, in which case your men might be fair game as well.) One wrong step, and KABLAAM!

Two: Piece identities remain secret. To engage in combat with an enemy piece, you merely push down on the attacking piece and then on the defending piece, and the computer informs you whether you won or not. And that's all it tells you. Did you kill a scout? A marshal? Who knows? It adds a lot of uncertainty to the game. (You don't have to play this way, but it is awesome; and to do this using a normal board, you'd need a third party just to compare pieces during attacks. Good luck finding anyone to volunteer for that.)

Three: Awesome sound effects. From the moment you turn it on, the thing emits a soundtrack worthy of an early Atari game. The interminable "drum roll"-esque sound (audible in the above snippet) accompanies your every move, and snippets of notable songs pepper the play. (The manual falls all over itself calling out each song; when attacking, you'll hear "a few bars of The William Tell Overture" instead of "heart-pumping attack music". Maybe it helped them corner the market of the culturally elite?)

Anyway, if you're in my General neck of the woods soon, Flag me down; I'll Scout out four AA batteries and we can Marshal our forces to engage in Major two-player electronic melee! (It'll be the Bomb!)

Playing Fair in the Free Markets

I recently bought ink for my fountain pen from a company called Noodler's Ink. This slogan of theirs made me stop and think:

Why is it called "Noodler's"? The ink with the catfish on the label symbolizes a southern sport that attempts to equalize the struggle between man and animal in the quest for a sense of fair play... and thus a fair price.

This bit of corporate PR jibes with their product: the glass bottles are industry standard (therefore cheap) and full to the brim with their high-quality ink, underselling their competitors by a ridiculous margin. They also "refuse" to make profit-heavy ink cartridges because of the ridiculously wasteful aspect of those devices.

Of course, they've gained something in return: my brand allegiance. Next time I need some ink, you can bet I'll be buying from them. In fact, it was such a good value for me that I probably won't even comparison shop. (Bonus: I'm sharing this on my blog, so maybe you'll buy ink there, too!)

Anyway, there's considerable discord as to exactly what "playing fair" means in a free market. (I'll focus specifically on supplier-consumer interaction, instead of competitive relationships among suppliers.) Examples:

• Is it "fair play" to cultivate brand allegiance? It warps the free market somewhat and can be said to remove agency from consumers. (Then again, the company paid a fair price for that brand allegiance—right?)

• Is it "fair play" to market to our baser needs? Several campaigns (arguably all modern ad blitzes) attempt to bypass consumers' rational minds and access the subconscious directly. This is especially apparent with, say, spray-on deodorant positioning itself to young men as the fast track to sex. Rational economic theory certainly doesn't account for this very well.

I hypothesize that the economic surplus of our consumer-culture market is heavily producer-skewed: Most consumers don't have the time, expertise, or inclination to fully assess the transactions they make (certainly not all the time). However, corporations, since they focus on a subset of products, spend the time and effort necessary to maximize the producer surplus (often via marketing strategies to inflate perceived value on the part of consumers, and via vertical differentiation and other forms of price discrimination). Therefore, most of the economic surplus in the consumer economy ends up in the hands of producers.

Whether corporations are "playing fair" or not, I think they're winning.

Optimistic note: Savvy consumers can negate this by learning to better estimate the value of a transaction to them, and by opting out of advertising where possible. In some situations, it's viable to leave the primary market entirely: Craigslist and other secondary markets are less heavily skewed in this manner.