U.S. workers and startup founders who receive restricted stock may elect the 83(b) election. It lets them pay taxes on this stock's complete fair market value when given, not upon vesting. This election applies to vesting stock. A person elects 83(b) to tax the shares at grant time by telling the IRS. This may help if the stock's value rises.

As for the 83(b) election deadline, one must send the appropriate documents to the IRS within 30 days of receiving the restricted stock. It's also necessary to provide the employer with a copy of this election form.

The strategic advantage of an 83(b) election form is that it allows for taxation based on a potentially lower valuation, assuming the stock's value will grow. As the company's value declines, more taxes may be paid than if the stock is taxed upon vesting. Founders and employees charged with stock compensation are taxed on the stock's fair market value at the time of award or transfer, less exercise or purchase charges. This tax is due in the year the stock is issued or transferred.

In many situations, employees receive stock that vests over time, meaning they earn shares as they continue working for the company. In such cases, without the 83(b) election, taxes on the stock's value are due at each vesting point. The annual taxable amount could also increase if the company's value increases during this period.

When and How to File an 83(b) Election

Filing an 83(b) election form is a time-sensitive action. Filing within 30 days after receiving restricted shares or electing to exercise options early is essential. Failing to do so means your shares will be taxed as ordinary income upon vesting. However, this election is generally irreversible, so it's important to weigh this decision carefully.

The process of filing an 83(b) election is straightforward. The employee must fill out and sign a form or letter in line with IRS Section 83(b). This document should include:

• The employee's name, address, and SSN are shown.
• A full description of the property granted, including the kind and number of shares, the receipt or purchase date, any limitations, and their fair market value.
• The amount paid for these shares.
• The gross income amount the employee will report on their tax return for these shares.
• The employee should then mail this form or letter to the appropriate IRS Service Center and provide a copy to their employer. It's recommended to use certified mail with a return receipt to have proof of the mailing date.

If you are unsure that the 83(b) election benefits you, you should talk to a qualified tax or financial advisor.

Suppose a company’s co-founder receives 1 million restricted shares valued at $0.001 per share. This amount totals $1,000, which the co-founder pays. The shares constitute a ten percent holding for the company, which vests over five years, giving him two hundred thousand shares yearly. Every year, their taxable amount would rely on the fair market value of the vested shares.

At the end of the first year, if the business becomes valued at $100,000, their stake should be ten percent, giving them ten thousand dollars. For the first year, the tax will be calculated as a percentage of the increased value ($9,000) based on the proportion of stock vesting (20%). This pattern continues each year as the company's value grows.

If the co-founder eventually sells all their shares at a profit, capital gains tax will apply to the sale's 83(b) election profits interest.

83(b) Election Tax Strategy

The 83(b) election is a tax strategy that allows a co-founder to pay taxes on equity immediately before the start of the vesting period. This approach means taxes are paid on the fair market value of the shares at the time of granting, minus any costs involved in exercising the options. There's no taxable gain if the fair market value equals the strike price.

By opting for an 83(b) election, the co-founder informs the IRS that they choose to report the difference between the purchase price and the stock's fair market value as taxable income. The value of a share at the time of vesting is not subject to additional taxation so long as the co-found holds on to such a valued share. Nevertheless, if these shares are disposed of with profit, they will be taxable under capital gains taxes.

Continuing the previous example case, where one of the co-founders chooses to opt-in for paying tax on the stock’s issued value over its FVP, he will have to produce the ced tax difference between the stock’s strike price and its FVP. For example, if the stock is sold after ten years and realizes $250,000, the taxable capital gain will be $249,000.

Therefore, the 83 (b) election is most appropriate when it can be expected that the market value will jump substantially during the holding period, especially when the taxable benefit on the date of acquisition is minor, for instance.

Conversely, suppose the stock's value decreases after making an 83(b) election, or the company goes bankrupt. In that case, the taxpayer may find they've overpaid on taxes for what is now lesser-valued or worthless equity. The pity is that the IRS does not make refunds for these situations. As such, if a person, after an 83 (b) election, had a tax liability worth $50,000 but the stock’s value decreased during the vesting period for four years, it would be economically wise if he or she had paid taxes on

Moreover, another disadvantage is experienced when an employee exits the firm before the completion of the vesting period. In this case, they would have paid taxes on shares they'll never receive. Additionally, if the reported income at the time of the stock grant is high, opting for an 83(b) election form may not be advantageous.