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83(b) Election Basics
An 83(b) election allows an individual to accelerate the date on which restricted shares are subject to ordinary income taxes, and potentially pay a lower tax now versus a higher tax in the future. A founder or an employee of a startup who receives restricted stock has 30 days to file an 83(b) election which can benefit them in the following ways:
- Lower Taxes: The Section 83(b) election allows the taxpayer to pay taxes on the current fair market value of the subject company’s stock, which is expected to be a lower fair market value than the stock in the future.
- Aligning benefits: This election benefits both the shareholder and the issuing company because if an offer is made with restricted shares that are vested over many years or milestones, both the employee and the company are responsible for keeping track of and calculating the market value and specific gain of unvested shares for tax reporting purposes, as well as withholding taxes based on the value of the shares.
- QSBS: As soon as the Section 83(b) election is filed the QSBS 5-year holding period starts regardless if the stock has vested or not.
How does an 83b election impact the QSBS 5 year holding period?
According to the Code of Federal Regulations and its subchapter on income tax,
“Under section 83(f), the holding period of transferred property to which section 83(a) applies shall begin just after such property is substantially vested. However, if the person who has performed the services in connection with which property is transferred has made an election under section 83(b), the holding period of such property shall begin just after the date such property is transferred.”
We determine this to mean that if the shares issued to an individual by the corporation meet all necessary conditions in Section 1202, and if the shareholder files an 83(b) election in a timely manner, then the 5 year holding period begins on the date the restricted shares were issued.
How do you make an 83b election?
In order to make an 83(b) election, the shareholder must complete the 83(b) election form and file it with the IRS no later than 30 days from the date of issuance of the restricted stock awards.
The form must be signed and dated, one copy sent to the IRS, another sent to the employing company, and one kept for the taxpayer’s own records. The issuing company needs the election to ensure proper reporting of regular income on the shareholder’s W-2 form.
The IRS has granted companies the authority to file Section 83(b) on behalf of their shareholders. If you have any questions about forms or deadlines, your employer should be able to help you.
According to the SEC, “The Section 83(b) election is irrevocable once filed unless the IRS consents to a revocation.”
How to file your 83b election on your tax return
Since 2015, it is no longer necessary to attach a physical copy of an 83(b) election to your annual tax return. However, it is imperative that taxpayers file this election with both the IRS and their employer promptly to be sure that all income tax paperwork is accurately filed.
The employer is required to recognize the income from restricted shares that are covered under the 83(b) election as ordinary income on the shareholders W-2 or 1099, depending on employment status. The restricted stock awards will be treated as ordinary income on your tax return. The dollar amount of the Section 83(b) election will flow through to your W-2 or 1099.
How does a non-US taxpayer make an 83(b) election?
Because of the tight deadline of 30 days to file an 83(b) election with the IRS, most tax advisors promote the ‘better safe than sorry’ philosophy and will guide non-US taxpayers to go ahead and file the election. Since the IRS has no published guidance on this situation and the form does require a taxpayer ID (e.g. a social security number or individual taxpayer identification number), non-US taxpayers who’ve received restricted shares from a startup are often advised to write “not applicable” in place of their taxpayer ID or possibly “applied for” if that is true in the case of the taxpayer.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
