Understanding the Mechanics of an 83(b) Election

Written By Michael Skolnick

An 83(b) election is a provision under the Internal Revenue Code that allows employees or startup founders to pay taxes on the total fair market value of restricted stock at the time of granting, rather than at the time of vesting. This can be beneficial in certain situations, especially when the stock is expected to appreciate significantly over time. Here’s a breakdown of how it works:

What is an 83(b) Election?

When you receive restricted stock, it typically vests over a period of time. Without an 83(b) election, you would pay taxes on the stock's value as it vests, which could result in higher taxes if the stock's value increases. By filing an 83(b) election, you choose to pay taxes on the stock's current value at the time of grant, potentially reducing your tax burden if the stock appreciates.

How to File an 83(b) Election

  1. Timing: The election must be filed within 30 days of receiving the restricted stock.

  2. Form: You need to submit a written statement to the IRS. This statement should include:

    • Your name, address, and Social Security number.

    • A description of the property (e.g., number of shares).

    • The date the property was transferred and the tax year for which the election is being made.

    • The fair market value of the property at the time of transfer.

    • The amount paid for the property, if any.

  3. Copies: Send the original statement to the IRS and a copy to your employer. Keep another copy for your records.

  4. Acknowledgment: The IRS does not send a confirmation, so ensure you have proof of mailing.

Benefits and Risks

Benefits:

  • Tax Savings: If the stock's value increases, you avoid paying higher taxes on the appreciated value.

  • Capital Gains: Future gains may be taxed at the lower capital gains rate rather than as ordinary income.

Risks:

  • Stock Value Decline: If the stock decreases in value or becomes worthless, you cannot recover the taxes paid.

  • Forfeiture: If you leave the company before the stock vests, you lose the stock and the taxes paid.

Conclusion

An 83(b) election can be a strategic tax planning tool for those receiving restricted stock, especially in startups or growing companies. However, it’s essential to weigh the potential benefits against the risks and consult with a tax advisor to determine if it’s the right choice for your situation.

I hope this helps clarify the mechanics of an 83(b) election! If you have any questions or need further details, feel free to ask.

Michael Skolnick