You may have heard of the 83(b) election before, especially if you’re a startup founder starting a new business. That’s because the 83(b) election, also referred to as the Section 83(b) election, allows you to pay taxes on the total fair market value of your equity when it’s granted, rather than at the time of vesting, saving you money in the long run.
Despite the term being well-known, many founders still have questions about how exactly the election works and what the process entails. In this article, we’ll review just that.
A Section 83(b) election is a letter that you mail to the Internal Revenue Service letting them know that you would like to be taxed on your equity on the date that you gain it rather than on the date that the equity vests. The equity, in this case, refers to the company stock, or restricted stock, that you own.
The 83(b) election is applicable only for stocks that can vest. Stocks that have fully vested are taxed at the time they are granted instead. What this means is that your ordinary income tax is accelerated, typically saving you money in the long term.
By filing an 83(b) election with the IRS, you can avoid a costly tax when your company’s shares vest.
Additionally, by filing, you can start the clock for the long-term capital gains holding period much sooner. This means that you can benefit from the long-term capital gains rate as long as your shares are sold more than a year after the time of grant.
This is significantly different than the timeline of a year after vesting to sell it without the 83(b). As the long-term capital gains tax rate is less than the ordinary income tax rate, it is a significant benefit to be taxed using the capital gains rate.
While filing is often beneficial for companies in the long run, there are some cases where it makes sense not to file.
These tax consequences include paying taxes on your initial stock grant with an 83(b). Doing so can cost more than some want to pay upfront. If the company fails sometime in the future, it would have been more economically sound to have not filed.
Additionally, you won’t need to file an 83(b) election form if your shares are fully vested at the time of issuance or stock options. If you don’t expect to remain at the startup company through the vesting periods, then you won’t receive any shares. Because of this, there’s no point to pay tax on the value of those shares.
These considerations are worth noting, and your personal situation should be properly discussed with a tax advisor who can help make sense of your unique circumstances.
The thing that must be noted above all else is that if you intend to file, make sure you do it within 30 days of your restricted stock being granted.
Before you file an 83(b) election, consider the benefits and drawbacks. If it makes sense for you to file, you’re in luck, the process is relatively straightforward.
You can obtain a blank or pre-filled IRS 83(b) election form online to download and print, or you can have an attorney draft the document for you.
The IRS usually requires handwritten signatures, however, the organization recently decided to temporarily allow 83(b) elections to be signed digitally or electronically through October 31, 2023.
Once you’ve obtained the form, complete it and mail it to the IRS within 30 days of the date you are granted equity. It’s recommended that you send two copies.
The form will ask you for personal information, including your name, address, and social security number. It will also ask you to describe what you were awarded. This includes:
There are individual boxes for all of this information. You should address the letter to the IRS Service Center you file your taxes with. Retain a copy for your own records, and, if you’re an employee, mail a copy to your employer.
Furthermore, depending on the state you’re in, you may be required to attach a copy of the filed form to your federal income tax return when you file your income taxes for the applicable taxable year. If you end up electing to file the 83(b) election, a great resource and template for doing so is provided by Fidelity, Instructions for Completing IRS Section 83(b) Form.
Now that you understand what an Section 83(b) election entails, you can speak with confidence to your tax advisor to figure out whether or not filing one is right for you.
If you end up filing the 83(b), understand that the process is relatively straightforward, but that it can end up convoluted if you don’t have the information you need readily available, or if there is language that is unclear. Leave time in your schedule to triple check your work before sending it in for review.
These articles do not represent legal advice. Before making any legal or financial business decisions, you should consult with a professional who can advise you based on your situation.