Demystifying the 83b Election: Everything You Need to Know to Understand It
If you’re a startup founder, investor, or executive, you may have heard of the 83b election but may be unsure about what it is or how it works. The 83b election is an essential tool you can use to help minimize your tax liability when it comes to vested equity. In this article, we will demystify the 83b election and cover everything you need to know to understand it better.
What is the 83b Election?
The 83b election is a choice you can make when you receive restricted stock or other vested equity. Normally, when you are granted restricted stock or other vesting equity, you don’t actually own the shares yet. Instead, the shares are subject to a vesting schedule, which means you must stay with the company or meet certain performance goals to receive the shares.
Once the shares are vested, they are taxed as ordinary income, which can lead to significant tax liability. However, if you make an 83b election, you can choose to pay taxes on the shares’ fair market value at the time of grant instead of when they vest.
Why Make an 83b Election?
By making an 83b election, you can potentially save thousands of dollars in taxes. When you make an 83b election, you are essentially electing to pay taxes on the shares’ fair market value at the time of grant, which can be significantly lower than the value at vesting.
For example, suppose you are granted restricted stock worth $10,000 that vests over four years. If you make an 83b election, you would pay taxes on the shares’ $10,000 value when they were granted, even though you don’t own them yet. Suppose the shares are worth $50,000 when they vest four years later. In that case, you will not owe any additional taxes when they vest and will have saved potentially thousands of dollars in taxes.
How to Make an 83b Election?
To make an 83b election, you must file a specific form with the IRS within 30 days of receiving the restricted stock or vesting equity. This form is called the 83(b) election form and must include details such as the fair market value of the shares, your tax year, and other relevant information.
It’s important to note that if you fail to file the 83b election form within 30 days, you will lose the option to make the election, and you will be taxed on the value of the shares when they vest.
Final Thoughts
The 83b election is an essential tool for anyone who receives restricted stock or other vesting equity. By making this election, you can minimize your tax liability and potentially save thousands of dollars.
Remember, when making an 83b election, make sure to file the appropriate form with the IRS within 30 days of receiving the shares. With that, you should now be well equipped to understand the 83b election better and start using it to your advantage.
