Updated July 28, 2026. Quick answer: A lookback applies your discount to the lower of the price on the offering date and the price on the purchase date. If the stock rose over the period, your effective discount off the current price is much larger than the stated percentage.
The mechanic
Without a lookback, a 15% discount off the purchase-date price is 15%. With one, you pay 15% off whichever of the two dates was cheaper.
| No lookback | With lookback | |
|---|---|---|
| Offering date price | $40 | $40 |
| Purchase date price | $60 | $60 |
| You pay | $51 | $34 |
| Effective discount off $60 | 15% | 43% |
Why this makes the disposition question sharper
The lookback inflates the spread at purchase — which is exactly the figure a disqualifying disposition taxes as ordinary income. Meanwhile the qualifying cap is measured on the offering-date discount, which the lookback does not inflate. So a strong lookback widens the gap between the two treatments.
A lookback is also why an ESPP is not simply a 15% return. In a rising stock it is materially better; in a falling one, the lookback protects you by pricing off the lower date.
Sources
IRC §423(b)(6); Treas. Reg. §1.423-2(g); IRC §423(c).
This states what the cited authority says. It is not tax advice.