If no action is taken, the IRS will tax this stock as it vests over time.
An 83(b) election directs the IRS to tax the stock at the time of the grant (when it may be worth very little or when payment is made), minimizing potential tax liability.
What are the consequences of failure to file an 83(b) election?
Failing to make a timely 83(b) election is one of the Top Ten Legal Mistakes Made by Entrepreneurs and is a mistake that could lead to severe real dollar tax consequences for a startup company founder or employee, including:
- Payment of ordinary income tax (up to 35% or higher) instead of capital gains (15%)
- Facing tax liability without a liquidity event each year as stock vests over time:
- Taxpayer will have to come out of pocket to pay taxes
- Substantial tax liability may be accelerated so that the taxpayer will have to pay taxes much earlier than otherwise
- You may face additional tax liability if the value of the stock increases and is then later forfeited
Yes, generally, filing an 83(b) election may have negative consequences if:
- Taxes are paid on stock that is ultimately forfeited. Here you could incur tax on unrealized net income.
- The value of the stock does not increase over time. Here you will have paid tax earlier than if you had not filed the 83(b) election.
“Generally, an 83(b) election will likely be advantageous if:
- the amount of income reported at grant is small;
- the stock’s growth prospects are moderate to strong; and
- the risk of stock forfeiture is very low.
To the contrary, an 83(b) election should generally be avoided where there is:
- a moderate to high risk of stock forfeiture; or
- a heavy tax burden at grant coupled with low to moderate growth prospects.”
The specific requirements of an 83(b) election can be found here. Additionally, it is important to note the following:
- You must file an 83(b) election within 30 days of the date you received the restricted stock. The IRS is not forgiving on this!
- The 83(b) election must be filed with the specific IRS office where you file your annual tax return.
- You must include a copy of your 83(b) election with your annual tax return (we can help!).
How do I file an 83(b) election?
You’ve come to the right place! Click here to quickly and easily complete and send your 83(b) election to the IRS.
A good FAQ and summary of the issues and requirements surrounding an 83(b) election can be found at mystockoptions.com
The foregoing is not to be considered tax or legal advice. You should consult with a professional tax advisor to determine if making an 83(b) election is appropriate in your specific circumstances.