83 (B) Elections - The Holloway Guide To Equity Compensation

11/20/2019 83(b) elections — The Holloway Guide to Equity Compensation
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Taxes on Equity Compensation ≫ 83(b) elections ≫
83(b) elections 4 minutes, 7 links
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Equity Compensation
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COMMON QUESTIONS COVERED HERE

What is an 83(b) election?
How do 83(b) elections work?

Can the 83(b) election be filed late?
Do incentive stock op
options qualify for 83(b)?
This section covers one of the most important and complex decisions you may
need to make regarding stock awards and stock options: paying taxes early
with an 83(b) election.
▪ Generally, restricted stock is taxed as ordinary income when it vests.
https://www.holloway.com/g/equity-compensation/sections/83b-elections 1/4
▪ If the stock is in a startup with low value, this may not result in high tax. If
H O Lit’s
L Obeen
W Ayears
Y since the stock was first granted and the company is now
LOG IN
worth a lot, the taxes owed could be quite significant.
DEFINITION
The Internal Revenue Code, in Section 83(b), offers taxpayers receiving

equity in exchange for work the option to pay taxes on their options before
they vest. If qualified, a person can tell the IRS they prefer this alternative in
a process called an 83(b) election. Paying taxes early with an 83(b) election
can potentially reduce taxes significantly. If the shares go up in value, the
taxes owed at vesting might be far greater than the taxes owed at the time of
receipt.
▪ CONFUSION Why is it called an election? Because you are electing

(choosing) to pay taxes early in exchange for this treatment by the IRS. Does
the IRS secretly enjoy making simple concepts sound confusing? We’re not
sure.
▪ An 83(b) election isn’t guaranteed to reduce your taxes, however. For

example, the value of the stock may not increase. And if you leave the
company before you vest, you don’t get back the taxes you’ve already paid.
▪ DANGER You must file the 83(b) election yourself with the IRS within 30
days of the grant or exercise, or the opportunity is irrevocably lost.
▪ CONFUSION Note an 83(b) election is made on receipt of actual shares of

stock. Technically, it cannot be made on the receipt of a stock option itself:
You first must exercise that option, then file the election.
▪ If you receive an early exercisable stock option (when you don’t have to wait
for the the stock to vest), you can make an 83(b) election upon receipt of the
exercised shares.
▪ Section 83(b) elections do not apply to vested shares; the election only
applies to stock that is not yet vested. Thus, if you receive options that are
not early exercisable (meaning you have to wait until they vest to exercise),
an 83(b) election would not apply.
▪ IMPORTANT Founders and very early employees will almost always want to
do an 83(b) election upon the receipt of unvested shares, since the stock
value is probably low. If the value is really low, and the taxes owed are not
that great, you can make the election without having to pay much tax and
start your capital gains holding period on the shares.
NEW With the passage of the Tax Cuts and Jobs Act (TCJA) in 2017,
H OCongress
L L O Wapproved
AY a new Section 83(i) that is intended to allow deferral
LOGof IN
tax
until RSU and stock option holders can sell shares to pay the tax bill. Whether
companies will choose or be able to make this available to employees is not
clear yet.
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RELATED SECTIONS
Restricted stock awards
Stock options
Stock awards vs ISOs vs NSOs
Tax comparison table
RELATED DEFINITIONS
Early exercise
Valuation
409A valuation
Vesting
FROM THE HOLLOWAY GUIDE TO
Equity Compensation
READ THE FULL GUIDE ≫
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What is an 83(b) election and how does it work?

What is an 83(b) election and how does it work?

When should someone file an 83(b) election?

When should someone file an 83(b) election?

11/20/2019 83(b) elections — The Holloway Guide to Equity Compensation

Taxes on Equity Compensation ≫ 83(b) elections ≫

83(b) elections 4 minutes, 7 links

FROM THE HOLLOWAY GUIDE TO

READ THE FULL GUIDE ≫

COMMON QUESTIONS COVERED HERE

How do 83(b) elections work?

▪ Generally, restricted stock is taxed as ordinary income when it vests.

The Internal Revenue Code, in Section 83(b), oﬀers taxpayers receiving

▪ CONFUSION Why is it called an election? Because you are electing

▪ An 83(b) election isn’t guaranteed to reduce your taxes, however. For

▪ CONFUSION Note an 83(b) election is made on receipt of actual shares of

✨ SPECIAL OFFER—25% OFF

THE HOLLOWAY GUIDE TO

Raising Venture Capital

Enter your email address

FROM THE HOLLOWAY GUIDE TO

READ THE FULL GUIDE ≫

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