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The 83(b) election is a provision under the Internal Revenue Code that empowers employees and startup founders to proactively manage their tax liabilities on restricted stock. By choosing to pay taxes on the total fair market value of granted restricted stock at the time of issuance, individuals can strategically navigate the tax landscape and potentially reduce their long-term tax burden.

The 83(b) election is a powerful tool for individuals holding restricted stock, allowing them to optimize their tax strategy by paying taxes upfront at the time of stock issuance rather than upon vesting. This article delves into the intricacies of the 83(b) election, exploring its benefits, considerations, and potential drawbacks.

The 83(b) election applies specifically to equity subject to vesting, serving as a mechanism for notifying the 

 of an individual’s decision to be taxed based on the stock’s fair market value at the granting stage. This differs from the conventional practice of taxing at the time of stock vesting. By making this election, individuals aim to proactively manage their tax liability and potentially capitalize on favorable valuation scenarios.

The 83(b) election applies specifically to equity subject to vesting, serving as a mechanism for notifying the IRS of an individual’s decision to be taxed based on the stock’s fair market value at the granting stage. This differs from the conventional practice of taxing at the time of stock vesting. By making this election, individuals aim to proactively manage their tax liability and potentially capitalize on favorable valuation scenarios.

To execute an 83(b) election effectively, individuals must adhere to specific steps:

An 83(b) election carries implications based on future equity value. If stock value surges, paying taxes on a lower valuation upfront can result in significant tax savings. Conversely, if the stock value dwindles, individuals might overpay taxes relative to the actual worth of their shares.

Here is a list of the benefits and drawbacks to consider.

When is it beneficial to file 83(b) election?

An 83(b) election is advantageous when individuals anticipate stock value growth and have the financial capacity to prepay taxes. It is particularly beneficial under the following circumstances:

Under such conditions, an 83(b) election can lead to substantial tax savings over the long term.

When is it detrimental to file 83(b) election?

Filing an 83(b) election might be disadvantageous in scenarios where stock value doesn’t appreciate or the individual’s employment terminates before the vesting period concludes. It is detrimental when:

Under these circumstances, the election could result in overpayment of taxes or may not provide any significant advantages.

The 83(b) election presents a strategic opportunity for individuals holding restricted stock to optimize their tax positions. By carefully evaluating the potential for stock appreciation and considering personal financial circumstances, individuals can make an informed decision regarding whether to file an 83(b) election. While it offers valuable tax benefits in the right conditions, it requires a thorough assessment of the associated risks and rewards.

In conclusion, the 83(b) election serves as a valuable tool for tax planning with restricted stock, providing individuals the opportunity to proactively manage their tax liabilities based on stock value at the time of issuance. By considering the potential for stock appreciation and personal financial circumstances, individuals can make an informed decision regarding whether to file an 83(b) election, thus strategically navigating their tax obligations.

 June 14, 2023—An older version of this article incorrectly stated that someone making an 83(b) election would be taxed according to the cost of exercising their shares. In fact, the tax is based on the difference between the fair market value of the shares and the exercise price.

Correction: June 14, 2023—An older version of this article incorrectly stated that someone making an 83(b) election would be taxed according to the cost of exercising their shares. In fact, the tax is based on the difference between the fair market value of the shares and the exercise price.

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Let’s explore a few scenarios that illustrate the application of the 83(b) election:

Scenario 1: anticipating substantial growth

Emily, an employee of a promising tech startup, is granted 10,000 shares of restricted stock valued at $1 per share. Instead of waiting for vesting and potential valuation increase, Emily files an 83(b) election. Over the next five years, the startup experiences exponential growth, and the stock value soars to $100 per share. Thanks to her proactive tax strategy, Emily only pays taxes on the initial $10,000 valuation, resulting in substantial tax savings.

Michael, another startup employee, decides against filing an 83(b) election. He holds off on paying taxes upfront. However, the company faces challenges, and its stock value declines to $0.50 per share by the time of vesting. Michael pays taxes on the current value, even though he initially had the option to pay taxes on a higher valuation with the 83(b) election. In this case, the election could have helped Michael avoid overpaying taxes.

Alice receives restricted stock in a well-established company valued at $50,000 upon grant. Given the high initial value, she decides not to file an 83(b) election. Over time, the stock value increases moderately to $55,000. Although the increase is not dramatic, Alice still pays taxes on the entire $55,000 value at vesting. In this instance, Alice may not experience significant tax savings compared to if she had filed an 83(b) election.

Frequently Asked Questions (FAQ) about 83(b) election

The 83(b) election allows individuals to choose upfront taxation on the fair market value of granted restricted stock, potentially leading to tax savings if the stock appreciates over time.

Filing an 83(b) election is beneficial when you anticipate significant stock value growth, have the financial capacity to pay taxes upfront, and reported income at stock issuance is relatively low.

No, the 83(b) election is specific to restricted stock. Stock options have a different taxation structure.

If stock value declines or your employment ends before vesting, you might overpay taxes. Additionally, if the amount of reported income is substantial at the time of stock granting, filing for an 83(b) election might not be advantageous.

No, the IRS does not allow for the reversal or amendment of an 83(b) election once it has been filed.

The 83(b) election is relevant specifically to equity subject to vesting, where taxation is based on the fair market value at the granting stage rather than at vesting.

The 83(b) election is a provision under the Internal Revenue Code that empowers employees and startup founders to proactively

83(b) Election: Tax Strategy and When and Why to File

83(b) Election: Tax Strategy and When and Why to File - SuperMoney

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83(b) Election: Tax Strategy and When and Why to File

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