What are 83(b) Elections and why are they important?

TLDR: An 83(b) election allows holders of restricted stock to be taxed on the value of their equity at the time it is granted, rather than when it vests, which may result in significant tax savings.

Section 83(b) of the U.S. Internal Revenue Code is a tax provision that allows non-public company employees and contractors who receive equity that is subject to vesting (often referred to as “restricted stock”) to be taxed on the fair market value of the equity they received at the date the equity was granted, rather than when the equity vests. Because restricted stock is often worth only a nominal amount when a start-up has just been formed (but will hopefully be worth much more when the stock vests), complying with Section 83(b) can result in significant tax savings.

If an 83(b) election is filed, a holder of restricted stock will be taxed at their ordinary income tax rate on the value of the equity on the day it was granted. However, if no 83(b) election is filed, a holder of restricted stock will be taxed at the applicable ordinary income tax rate on the value of the equity at the time of vesting.

How and When Is an 83(b) Election Filed? In order to take advantage of Section 83(b), the holder of restricted stock must file what is known as an 83(b) election by mailing a letter to the Internal Revenue Service (IRS) no later than 30 days after the holder is granted the equity. The letter should contain a statement that you are electing to be taxed on your equity at the time of grant and contain the details of your stock grant. Your legal counsel should be able to provide a form and guidance on making the filing, but you bear the ultimate responsibility for ensuring that the filing is completed and delivered on time.

An Example:

If an employee receives 100,000 shares of restricted stock worth $.01 per share at the date of grant, the employee will only owe ordinary income tax on $1,000 (100,000 x $.01) if an 83(b) election is filed, even if the value of the stock has increased 100x by the time the stock actually vests. However, if the restricted stock is worth $1 per share at the time of vesting and no 83(b) election was filed, the employee will owe ordinary income tax on $100,000 (100,000 x $1).

Keep in Mind:

• Section 83(b) applies to restricted stock, but NOT stock options.
• Failure to file an 83(b) election within 30 days of being granted equity will result in the holder owing income tax on the value of the equity at the time it vests. Unfortunately, there isn’t a way to retroactively file the election. The IRS is generally strict about the 30-day deadline, and there is no official procedure to request an extension or a waiver for the deadline.
• One downside of filing an 83(b) election is that the taxes must be paid upfront.

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