What Are 83(b) Elections and Why Are They REALLY Important?

If you were a young corporate lawyer beginning your career at a law firm, your mentors would likely reassure you that all of your (inevitable) future mistakes will be fixable. EXCEPT, that is, for missing 83(b) Election filing deadlines*. They’d also tell you that, aside from being unfixable, missing an 83(b) filing can have catastrophic tax consequences. So, let’s talk more about what 83(b) elections are and why you should really care about filing yours on time!

What Are 83(b) Elections?

An 83(b) election is a form that you can file with the IRS whenever you receive stock that’s subject to vesting. This applies both to stock that’s issued to you outright, and to stock that you receive as a result of early-exercising an option grant. The IRS requires that an 83(b) election be filed within 30 days of the issuance of the applicable stock. If you miss this deadline, the IRS will not allow you to fix it.  

Here’s some background: The default way that the IRS taxes stock that’s subject to vesting is that they tax you on each portion of stock when it vests, at whatever its value is at that time. But, if you file an 83(b) election, the IRS will instead tax you on your entire amount of stock now (even the unvested portion) based on its initial value at issuance (which is likely negligible). So, the assumption you’re making when you choose to file an 83(b) election is that the stock’s value when you file it is lower than it will be later (i.e. as it vests).

Therefore, for stock that’s issued early in the company’s lifecycle when the valuation is (presumably) pretty low, it almost always makes sense to file an 83(b). For later issuances at higher valuations, the decision of whether you should file an 83(b) is highly dependent on context - both the company’s situation and your individual tax situation as well. So, you should always talk to your tax advisor when you’re considering whether to file an 83(b) election.

TL;DR - The more the company’s value increases between your initial stock issuance and when that stock vests, the more money you’ll save in taxes by filing an 83(b) election.

Other Considerations

83(b) elections can be beneficial in other ways as well: 

• Long Term Capital Gains: Filing an 83(b) starts your one-year long-term capital gains holding period; it tells the IRS to start that one year clock when the shares are issued, when otherwise that one-year clock wouldn’t start until the shares vest. If you qualify to pay the long-term capital gains rate when you sell your shares, you’ll pay a lower tax rate on that sale than you otherwise would. 
• QSBS: Similarly, the QSBS (Qualified Small Business Stock) 5-year holding period starts when you file your 83(b). If your shares qualify for QSBS tax treatment when you sell them, it’s possible to avoid federal tax entirely. The details of QSBS treatment are beyond this article’s scope, but the implications are worth understanding; ask your lawyer or tax advisor!
• Certainty: If you don’t file an 83(b) and you therefore have to pay taxes on your shares as they vest, there’s no way to predict what your tax bill will be (because there’s no way to predict the value of those shares when they vest). 

Again, you should definitely discuss these items with your tax advisor. But, hopefully this gave you a good framework for understanding the riveting world of 83(b) elections!

*NOTE: For this reason, most law firms won't file 83(b) elections on anyone's behalf anymore; too much un-fixable liability if they screw it up. But, they'll still provide you with all the necessary paperwork, and guide you through the process to file it yourself!

Disclaimer: The content provided in the Amplify Legal Hub is intended for informational purposes only and should not be construed as legal advice. Always consult a qualified legal professional for advice tailored to your specific situation.