Congratulations! First, let’s ring the gong because you either received equity or you’re going to receive equity and that is exciting! If you’re a founder, employee at a startup, advisor, or investor… you’re in the right place! Also, kudos on doing your research and learning about 83(b) elections. We understand this isn’t the most exciting stuff, but it can save you significant money on taxes in the future. There are a few formalities that you need to consider, including filing an 83(b) election with the Internal Revenue Service.
Section 83(b) Overview.
Section 83(b) of the Internal Revenue Code gives founders (and those receiving stock subject to vesting) the option to pay taxes on the value of stock subject to vesting at the time it was granted; rather than the stock value overtime. If you plan to raise a Unicorn or Zebra, and foresee future growth, you likely should file a form 83(b). If you think the company might flop, you might consider waiting it out and paying taxes *if* the stock fully vests.
30 days is the short deadline for filing form 83(b) with the IRS after you are issued equity subject to vesting. This 30 day timeframe starts on the day the stock is issued. By filing an 83(b) election you are letting the IRS know that you want to be taxed on the equity from the date it was granted, not the date that it vests. If your stock fully vests at the onset, you don’t have to worry about filing an 83(b) because you will pay taxes on the vested value. If your stock is subject to vesting and you don’t file the form, you subject yourself to high tax rates as the stock vests overtime.
Again: You must file Form 83(b) with the IRS within 30 days from receiving your vesting stock options. If you pass this deadline, TOO BAD SO SAD. The election will be void.
In this case, the benefits really do outweigh the risks. Founders, employees, investors, and advisors who might receive equity subject to vesting should file an 83(b) election. The benefits include:
- Potential for significant tax savings because the amount of income reported at the time of the grant is smaller than at the time the value is realized; and
- Any growth in value of the stock when fully vested is taxed at the time the stock was issued, not at the time of vesting
Whereas average income tax ranges from thirty to forty percent, long term capital gains taxes range from zero to twenty percent. If you file an 83(b), you will be responsible for income tax on the par value of the stock (typically 39.6% x (# of shares x $0.01)) aka a nominal amount, and capital gains tax when fully vested (typically 20% tax). If you do not file an 83(b), you will pay income tax on the recognized income when the stock vests (average of 39.6% x (vested value of stock)), and the long-term capital gains tax at time of sale (typically 20% tax). Unless you’re sure the startup will flop or the value will not significantly increase, its worth it to file an 83(b) and take the tax cut.
As a reminder, you do not need to file an 83(b) if, at the time the stock is granted, the stock is fully vested. Additionally, if the company fails, and you file and 83(b) election, you will have paid taxes on unrealized income. If you have any inclination that the company may not be successful, you might consider waiting it out and paying the taxes as they are due (upon vesting).
As always, you should consult with your tax and legal professionals to ensure you make the right decision for your specific circumstances.
To file an 83(b) election, you must submit a letter to the applicable IRS Service Center within 30 days from the first day the stock was granted. After you file with the IRS, send a letter to your employer noting the 83(b) election. Once completed and filed, retain a copy for your records with the certified mail proof of mailing receipt.
Of course, you should contact your financial and legal advisors to ensure proper filing and receive advice for your specific situation.
Click through to our Form 83(b) Election Checklist for a template letter and step-by-step filing instructions.