Key Takeaways
- Elect to tax restricted stock at grant date.
- Locks in low basis; future gains taxed lower.
- Must file within 30 days; irrevocable election.
- Risk paying tax on forfeited unvested stock.
What is 83(b) Election?
An 83(b) election is a tax election under Internal Revenue Code Section 83 that allows recipients of restricted stock or other substantially nonvested property to recognize income at the time of transfer rather than at vesting. This election can convert future appreciation into capital gains, which are typically taxed at lower rates than ordinary income.
Making this election is particularly relevant for employees or founders receiving stock in a C corporation or other entities where equity compensation vests over time.
Key Characteristics
The 83(b) election has specific features that impact tax timing and basis calculation:
- Timing: You must file the election within 30 days of receiving the property, with no extensions allowed.
- Taxation: Income recognized is based on the fair market value at transfer minus any amount paid, reported as ordinary income.
- Capital gains start date: The holding period for capital gains treatment begins immediately after filing.
- Risk: You pay tax on the property even if it is forfeited later, with no refund.
- Limitations: The election applies only to restricted stock, not to stock options or restricted stock units.
How It Works
When you receive substantially nonvested stock, making an 83(b) election means you report the stock's value as ordinary income in the year of transfer, based on its fair market value (FMV) at that time. This shifts the tax burden upfront, avoiding higher ordinary income taxes later when the stock vests and potentially appreciates significantly.
By filing the election, you lock in a low cost basis, and any subsequent appreciation is taxed as capital gains, which often have lower rates. The election must be submitted to the IRS within 30 days using a specific form or statement, and you must provide copies to your employer or transferor.
Examples and Use Cases
Understanding practical scenarios helps illustrate the benefits of an 83(b) election:
- Startups: Founders receiving shares in an early-stage company with low initial valuation often use 83(b) elections to minimize taxes on future growth.
- Public Companies: Employees at established firms like Delta may rarely use 83(b) elections since stock typically vests at market value, but it remains an option for restricted grants.
- Growth Stocks: Investors interested in best growth stocks sometimes use 83(b) elections to optimize tax outcomes on equity compensation.
Important Considerations
Before making an 83(b) election, consider the risk of paying taxes on stock that might forfeit if you leave your company. Since the election is irrevocable without IRS consent, consulting a tax advisor is critical to navigate complex rules and ensure compliance.
Also, keep detailed records of your election and include the information on your W-2 form where applicable. State tax treatments may differ, so review local regulations alongside federal rules.
Final Words
Filing an 83(b) election can significantly reduce your tax burden on restricted stock by locking in income at grant date values and starting capital gains treatment early. Evaluate your stock’s current value and risk of forfeiture, then consult a tax advisor to ensure timely and accurate filing within 30 days.
Frequently Asked Questions
An 83(b) election allows recipients of restricted stock to pay taxes on the fair market value at the time of transfer rather than at vesting. This can reduce overall taxes by converting future appreciation into capital gains, which are usually taxed at lower rates.
Individuals receiving substantially nonvested property like restricted stock, especially in startups with low initial stock value, should consider it. The election helps minimize taxes on future appreciation and starts the capital gains holding period immediately.
The main risk is paying tax upfront on stock that might never vest or could decrease in value, with no refunds if shares are forfeited. However, the tax basis adjusts if shares are forfeited, but you still bear the upfront tax cost.
No, the 83(b) election is only available for substantially nonvested property like restricted stock. It does not apply to stock options or restricted stock units (RSUs).
You must file the election within 30 days of the stock transfer date, with no extensions allowed. The filing requires a detailed statement including your information, property description, transfer date, fair market value, and amount paid, sent by certified mail to the IRS.
If you miss the strict 30-day deadline, you cannot make the 83(b) election for that transfer. The IRS does not grant extensions, even for weekends or holidays, so you will be taxed at vesting instead.
By making the election, you pay ordinary income tax on the stock's fair market value at grant, and any future appreciation is taxed as capital gains, which usually have lower rates. This can significantly reduce taxes for rapidly appreciating startup shares.
