If you receive company stock that vests over time, a Section 83(b) election could save you a lot of tax. However, you must file it within 30 days of receiving the stock, and there are no extensions. This guide explains what a Section 83(b) election is, when it helps and how to file one.
What is a Section 83(b) election?
Normally, when you receive restricted stock that vests over time, you pay ordinary income tax as each portion vests. The taxable amount is the stock’s value at vesting, minus anything you paid.
A Section 83(b) election changes that timing. Instead, you choose to pay tax on the stock’s value when you receive it. Then you owe nothing more at vesting. Later, when you sell, any further growth is a capital gain.
Note that the election applies to actual shares subject to vesting, such as founder stock or early-exercised options. It doesn’t apply to RSUs, and fully vested stock is already taxed when you receive it.
Why a Section 83(b) election can save tax
Ordinary income is taxed at rates up to 37%. By contrast, long-term capital gains are taxed at rates up to 20%. So the goal is to have as much of your gain as possible taxed as long-term capital gain.
Example
Say a founder receives 1,000,000 shares worth $0.001 each, so $1,000 in total. The shares vest over four years. Later, they are worth $2 each at vesting, and she eventually sells for $5 each. For simplicity, assume top federal rates and ignore state and payroll taxes.
- With an 83(b) election: She pays ordinary tax on $1,000 now, about $370. Then, at sale, her $4,999,000 gain is long-term capital gain, taxed at 20%, or about $999,800. Her total tax is about $1,000,170.
- Without an election: She pays ordinary tax on $2,000,000 as the shares vest, about $740,000. Then, at sale, her $3,000,000 gain is taxed at 20%, or $600,000. Her total tax is about $1,340,000.
In this example, the election saves about $340,000. It also avoids large tax bills at vesting, when she may not have cash to pay. In addition, her capital gain holding period starts when she receives the shares, not when they vest.
When a Section 83(b) election may not make sense
The election works best when the stock is worth very little at grant. However, if the stock is already valuable, the election means paying real tax up front. And if the company fails, or you leave before vesting and forfeit the shares, you generally can’t get that tax back. So weigh the risk carefully with your tax advisor.
How to file a Section 83(b) election
- Prepare the election. You can use IRS Form 15620 or a written statement with the required details.
- File within 30 days. Send it to the IRS within 30 days after you receive the stock. Use certified mail with return receipt, and keep proof of the mailing date.
- Give a copy to your company. Also, keep a copy for your records.
The 30-day deadline is strict. If you miss it, you can’t fix it later.
Get help with your Section 83(b) election
We help founders and early employees decide whether to file and prepare the election correctly. To discuss your equity, call (415) 842-2940 or book a free 15-minute call.