What is an 83(b) Election?

The 83(b) election is a provision under the Internal Revenue Code (IRC) Section 83(b). It allows individuals receiving restricted stock to pay taxes on the total fair market value (FMV) of the award at the time of issuance, rather than at the time of vesting​​​​. This election is particularly relevant when you’re granted equity that vests over time and is subject to a substantial risk of forfeiture, meaning you must meet certain conditions, like remaining with the company for a specific period, to own the equity outright​​.

Benefits of an 83(b) Election

1. Tax Savings: By opting for an 83(b) election, you pay taxes based on the equity’s FMV at the grant date, which is typically lower, especially in startups. This can result in significant tax savings if the value of the equity increases over the vesting period​​​​.
2. Capital Gains Advantage: It starts the clock for long-term capital gains earlier. If the stock appreciates in value, any increase in value after the 83(b) election is taxed as capital gains, which are usually taxed at a lower rate than ordinary income​​​​.
3. Administrative Simplicity: For both the individual and the issuing company, an 83(b) election can simplify tax reporting and reduce administrative burdens​​.

Key Considerations

1. Timing: The election must be filed with the IRS within 30 days of receiving the restricted stock, with no exceptions. Late filings are not accepted​​​​.
2. Risk Assessment: Filing an 83(b) election is essentially betting on the stock’s future increase in value and your ability to meet the vesting conditions. If the stock value decreases, or if you don’t meet the vesting criteria, you could end up paying more taxes than necessary​​​​.
3. Irrevocability: Once made, an 83(b) election is generally irrevocable. You must be confident about your long-term commitment to the company and the potential growth of your equity​​.
4. Filing Process: The 83(b) election involves a multi-step process, including sending a completed election form to the IRS, with a copy to the issuing company. It’s advised to file by certified mail to prove timely filing​​​​.
5. No Need for Fully Vested Shares: If your shares are fully vested at the time of issuance, an 83(b) election is not necessary​​.

Conclusion

The 83(b) election can be a powerful tool for managing tax liabilities when receiving equity compensation. However, it requires careful consideration of your financial situation, commitment to the company, and the potential growth of the stock. Consulting with a financial advisor or tax professional who is familiar with the exact circumstances is highly recommended to navigate this decision.