In this article, we’ll provide you with an overview of 83(b) elections, including:

What is an 83(b) election?

If you receive restricted stock or have the ability to exercise your stock options prior to vesting (early exercise), an 83(b) tax election enables your equity to be taxed when it is issued rather than when it vests. Typically, the fair market value (FMV) of your equity is much lower when it is issued than when it vests. For individuals who early exercise options, if the exercise price equals the current FMV, it means you could owe no taxes when you exercise.

However, this 83(b) election must be filed within 30 days of the stock issuance in order to qualify for the special tax treatment. You may recall the IRS extended the 30-day filing deadline in 2020 due to delays in mail delivery times. In 2022, it’s back to business as usual.

 

What is the benefit of an 83(b) election?

If your equity goes up in value, the benefit of an 83(b) election is that you pay less taxes on your equity. Additionally, depending on the type of equity (and subject to meeting holding period requirements), if you sell the options you’re only taxed at the capital gains tax rate – a rate much lower than ordinary income tax.

Example impact of 83(b) election

83(b) election Without an 83(b) election
Number of RSs issued 100,000 100,000
Taxable event At time of RS grant At time of RS vesting
FMV per share at time of grant $1.00 $1.00
FMV per share at time of vesting $5.00 $5.00
FMV of all shares at time of taxable event $100,000 $500,000
Taxes paid at taxable event (35% ordinary income tax rate) $35,000 $175,000

 

What happens if you don’t make an 83(b) election?

If you don’t make an 83(b) election you’re likely to pay more in taxes over the course of owning this stock (see table above). As was mentioned above, this is because you’ll pay taxes on the difference between the FMV at the date of vest over the purchase price rather than the FMV at the date of exercise over the purchase price. Typically, the FMV when stocks vest is higher than the FMV on the grant date.

 

Why would you not make an 83(b) election?

There are reasons why an 83(b) election might not make sense for you. Those reasons include:

 

Should you file an 83(b) election?

Everyone’s situation is different, but generally 83(b) elections help you pay less in taxes. If you’re confident your company’s value will only increase and you have the cash to cover exercise costs and the possible associated income taxes, then it might be worthwhile to file. However, seeking the advice of a tax advisor who works with startup founders and employees, and understands the complexities surrounding 83(b) elections can help you make the best decision for your situation.

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