What Is An 83(b) Election and Should You File One?

This article provides a broad overview of Section 83 of the Internal Revenue Code and how it affects founders and employees who purchase stock that is subject to vesting.  That is, stock that individuals gain rights to overtime.  It also discusses who may want to make an 83(b) election and how they can do so.

Who should be concerned about Section 83 of the Internal Revenue Code?

Section 83 should be of particular concern to founders and employees who receive stock that is subject to vesting.  Two examples are when a founder or an employee sign a restricted stock purchase agreement or if they agree to a stock option plan that allows them to exercise their options prior to vesting, but subject to a restrictive stock agreement.  However, these are just two examples – you should consult your tax and legal counsel to determine whether your particular circumstances raise a potential Section 83 issue before signing a stock purchase agreement.

What is Section 83 and what happens if you do not file an 83(b) election?

Under Section 83, if you purchase stock that is subject to vesting and do not file an 83(b) election, you will pay income tax on the difference between the price paid for the stock and the stock’s fair market value when it vests, even if you do not sell the stock at that time.  In addition, the holding period for determining whether the income from the sale of the shares qualify for long term capital gains treatment does not begin until the shares have vested.

How is the income from stock taxed if you make an 83(b) election?

In contrast, if you make an 83(b) election, the income from the stock is recognized at the time of the stock “transfer” - its purchase date – rather than when the stock vests. The long term capital gains holding period also begins on the purchase date of the stock.

Why is it important when the income from your stock is recognized?

Often the purchase price and the fair market value of stock on its purchase date are the same.  Thus, if you make an 83(b) election, you may not have any income to recognize from the stock purchase and may only have to pay capital gains tax when the stock is sold.

However, if you do not make an 83(b) election, you may have substantial income tax liability when the stock vests if the stock increases in value, even if you do not sell it.

You, therefore, may want to file an 83(b) election, particularly if you believe the stock is likely to increase in value.  By doing so, the income from the stock will be recognized before it increases in value.  As an added bonus, by filing the 83(b) you will also start the one year holding period for long term capital gains treatment from the date you purchase the shares.

What is an example of how stock subject to vesting is treated under Section 83?

You and a friend start a company and purchase stock at the par value of $.0001 per share that is subject to a one year cliff and a four year vesting period.  Your friend promptly files an 83(b) election, but you forget to do so.  At the end of the one year cliff the stock is worth $1.00 per share.  Because you did not timely file an 83(b) election, you would recognize $0.99 per share as income, even if you do not sell the stock.  As the remaining stock vests, you would also recognize income equal to the difference between the fair market value of the stock and the $.0001 per share price at which you purchased it.

In contrast, because your friend promptly made an 83(b) election, they would not recognize any income as the stock vests because the 83(b) election accelerated the recognition of the income from the stock transfer to the purchase date.

What are the drawbacks to making an 83(b) election?

If you do not pay fair market value for the stock and make an 83(b) election, you could possibly pay income tax on stock that does not provide you with any benefit.

For example, you join a company in June of 2011 that was started in May of 2010.  You purchase 1,000 shares of restricted stock at the par value of $.0001 per share.

However, the company has been running for over a year and the fair market value of the shares is no longer par value, but is instead $1.00 per share.

If you file an 83(b) election, you would pay income tax on the difference between the fair market value of the stock and what you paid for your shares.  In this example, you would pay income tax on $990.90.

If the company  later dissolves and the stock is worthless, you would not receive any benefit from the income tax you paid.  In addition, if you later forfeit the stock, perhaps by leaving the company, you will not be allowed a deduction for the income tax you paid on the stock at the time you made the 83(b) election.

However, if the purchase price and the fair market value of stock are the same and you make an 83(b) election, you would not have any income to recognize from the stock purchase and may only have to pay capital gains tax when the stock is sold.

How much time do you have to make an 83(b) election?

You must file an 83(b) election no later than 30 days after the stock has been transferred.   The stock has been transferred on the purchase date of the stock, which is when you assume ownership of the stock.  The postmark date is the date of the filing.

How do you make an 83(b) filing?

The 83(b) election must include:

  1. Your name, address, and tax identification number.
  2. A description of the property for which you are making the election.  For example, “25 shares of common stock in X company.”
  3. The date on which the property was transferred and the tax year for which you are making the election.
  4. The nature of any restrictions on the stock.  For example, “Stock must be forfeited if employment terminates before June 1, 2015.”
  5. The fair market value at the time of the transfer (ignoring restrictions except those that will never lapse) for which you are making the election.
  6. Any amount you paid for the stock.
  7. A statement that you have provided the required copies of the election, such as: “I have provided copies of this election as required in the regulation.”

The IRS does not provide a form 83(b) election, but you can find a sample 83(b) election form here.  It is strongly recommended that if you decide to make an 83(b ) election, you send it via certified mail.

What else must you do to properly file an 83(b) election?

You should make two copies of the 83(b) election:

  1. Attach a copy of the 83(b) election to your tax return for the year the stock was transferred; and
  2. Provide a copy of the election to the company from which you received the stock.

If your employer transferred the stock to someone besides yourself, you must also provide a copy of the 83(b) election to that person as well.

Do you have any 83(b) tips or advice?  If so, please provide them in the comments below.

Disclaimer: This article is intended to provide information for your general education.  It is not intended to be used and should not be used for the purpose of avoiding federal income tax penalties.  Although the article discusses general legal and tax issues, it does not constitute legal advice.  You should not act or refrain from acting on the basis of any information in this article.  Instead you should seek the advice of tax or legal counsel who can discuss the facts and circumstances of your particular business or personal needs.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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About bendlawgroup

Doug is the founder of Bend Law Group, PC, a law firm focused on advising small businesses and startups. He is passionate about providing exceptional legal service to entrepreneurs so they can focus on successfully running their businesses.
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21 Responses to What Is An 83(b) Election and Should You File One?

  1. Hi,
    Thanks for the information. I have a question about my situation. I recently left my company A and bought some of the vested stocks there. The price I bought the stocks is at .28. However the HR mentioned that the current fair market value is at .44. Would it be a good idea to file 83(b)?

  2. Shiva,

    Thank you for your comment. The day you signed the stock purchase agreement is important. You must file an 83(b) election no later than 30 days after the stock has been transferred, which in your case is most likely the day you signed the stock purchase agreement and assumed ownership of the stock. Did you sign the stock purchase agreement more than 30 days ago? If so, it might be too late to file an 83(b) election.

    Thank you again for your comment,
    Doug

  3. Billy Gee says:

    Thank you Doug
    I am getting ready to register a new S Corp and wish to make an 83(b) election. Shortly after incorporation I want to transfer the shares into a trust also at par value – do I need to make a second 83(b) election in the name of the trust – and if so do I have a further 30 days to do that? I suspect the trust will probably be a flow through trust for tax purposes hence any income from the S Corp will follow through the Trust into my personal income tax – and I suspect any capital gain on the sale of shares may too – although I am not 100% on that?

  4. Billy,

    Thank you very much for you comment. Your comment is very specialized. I will send you an e-mail to discuss it.

    Thank you again,
    Doug

  5. Founder says:

    Hi Doug,

    This was a great article and raised questions as a founder of a startup.

    I started a company back in March 2009 and incorporated the business in Delaware. I paid $5,000 for my shares at the start of the company and had the certificate in hand. I did not file an 83(b) election form because the stock was not subject to vesting since I was the owner of the company.

    A year later in March 2010 I raised $2 million from investors. These investors made me sign a stock restriction agreement to vest the shares I purchased in March 2009 over three years. Upon signing this agreement 25% of my shares immediately vested and the rest vested over three years. I did not file an 83(b) election after taking on this investment.

    In January 2011 I sold the company, did not receive any cash and had to fill out another stock restriction agreement from Company B (the company that purchased my company). This time my stock changed from Company A’s common stock (the company I sold) to Company B’s common stock which vests over one year – 25% after 6 months, 25% after 8 months, 25% after 10 months and 25% after 12 months. As I write this 50% of the stock has vested.

    As the stock has been vesting over the past few months I have been selling it. Since I purchased the stock back in March 2009, 1.) is this considered a long-term capital gain? 2.) Can I benefit from an 83(b) election form and/or is it way to late at this point?

    Any thoughts you could provide to me regarding my options and how you would proceed would be greatly appreciated.

    Best Regards,

    X

  6. Sean,

    Thank you for your comment.

    Is there a good number for me to reach you at to discuss your specific case?

    Thank you again,
    Doug

  7. I called up Doug to get assistance with the 83b and he was extremely helpful. He provided a great reference to folks with deep expertise in the tax implications of the 83b.

  8. Hi Doug! Perhaps you can direct me, I exercised some options about five years ago, and never filed the 83b. The current value of the shares is around $7k – not much but I have the opportunity to sell it and cash in. Our corporate atty is concerned that because I did not file the 83b, I may be subject to taxes, etc.. that will make it a waste of time and money to sell. Can you help? My cell number is 951.691.9328 if you would like to talk. Thanks!

  9. bendlawgroup says:

    Adrianne,

    It was very nice to speak with you today. Please let me know if I can be of any further assistance.

    Thanks!

    Doug

  10. Gloo Mydog says:

    Hi Doug

    Do you know what happens if you file 83(b) election, but later failed to include a copy of it in that year’s tax return?

  11. bendlawgroup says:

    Gloo,

    It was very nice to hear from you. Thank you for taking the time to leave a comment.

    When you get a chance, please call me at (415) 963-9670 and I will see what I can do to help.

    Thanks again,
    Doug

  12. HI Doug,

    I think I have the same issue as Gloo. I have no idea if I filed the 83b election form with my tax return for 2008. I don’t think I ever knew you had to file a copy with my tax return. If I didn’t send it with my return do I lose the 83B election?

    Thanks
    Karen

  13. bendlawgroup says:

    Hi Karen,

    It was very nice to hear from you. Thank you for taking the time to read my post and for reaching out. When you get a chance, please call me at (415) 963-9670 and I will see what I can do to help you out.

    Thanks again,
    Doug

  14. jennibrite says:

    Hi Doug,
    Thank you for this article. It was very informative and explains the 83(b) election very well. I signed a stock agreement in February of this year for a start-up I am no longer working for. I did not file an 83(b) election within 30 days of signing this agreement. Consequently, I have been asked to sign an amendment to the original agreement that removes sections that mention any vesting of the stock and Election Under Section 83(b) of the Code.

    I believe this is positive as it will remove the vesting period for my stock and any filing requirements. However, in general, could there be a downside to this type of change for the stock recipient?

    Thank you very much for any information you can provide.

  15. bendlawgroup says:

    Hi Jenni,

    Thank you for taking the time to read my post and to leave a comment. Can you please e-mail me a good number to reach you to discuss your particular situation at Doug@bendlawoffice.com?

    Thanks again,
    Doug

  16. Hi Doug,

    Your article says that the filing date is the postmarked date. I’ve been told that the IRS needs to receive my 83(b) election within 30 days. Which is it?

    In my case, tomorrow will be 30 days and I’m planning on mailing it in the morning, so I hope you’re right!

  17. bendlawgroup says:

    Hi John,

    You should consult with your tax attorney or CPA about your particular situation, but it might be helpful to review Internal Revenue Bulletin: 2012-28, which provides in part” “Under § 83(b)(2), an election made under § 83(b) . . . must be filed with the Internal Revenue Service no later than 30 days after the date that the property is transferred to the service provider. In accordance with § 7503, if the thirtieth day following the transfer of property falls on a Saturday, Sunday or legal holiday, the election will be considered timely filed if it is postmarked by the next business day.”

    Thanks,
    Doug

  18. Hi John, in the case where I have been issued restrictive stock options subject to a vesting period, and I want to exercise in full….can you confirm if the 30 day deadline is from date of issue or date of exercise?

    thanks
    Mike

  19. bendlawgroup says:

    Hi Mike,

    Thank you for taking the time to read my post and to leave a comment. Can you please e-mail me a good number to reach you to discuss your particular situation at Doug@bendlawoffice.com?

    Thanks again,
    Doug

  20. mjhsr says:

    Hi Doug,
    I am receiving shares at $1.00/share. I have the option of paying the tax now(83B) or not. The payout is 3 years from now. These shares are fully vested when received. I am in California so I will need to pay state tax at ~10% even though I would be taxed capital gains if I elected the 83B. My Federal is stated to be at 28% but it is never that high after I file taxes. So in California long term capital gains is really ~30%
    Do you pay Social security, or anything else along with capital gains in California?

    Do you think it worth it to file the 83B if after 3 years the share price only goes to $5/share as expected

    Thanks

    Mike

  21. bendlawgroup says:

    Hi Mike,

    Thank you for your comment.

    Can you please e-mail me at doug@bendlawoffice.com to discuss your specific case?

    Thank you again,
    Doug

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