What Is An 83(b) Election • Learn with Valur

83(b) Election

An 83(b) election is a decision you make when you receive stock from your employer. It allows you to pay taxes on the stock at its current value, rather than when it vests. This can be beneficial if the stock’s value increases in the future. In this blog post, we will discuss what an 83(b) election is and when you should make one!

The 83(b) election comes from Section 83 of the Internal Revenue Code. This section covers the taxation of certain property transfers, including those made in connection with the performance of services. When an employee receives stock as part of their compensation, they have to option to declare an 83(b) election within 30 days of receiving the stock.

Benefits of making an 83(b) election

When you are given stock options or restricted stock units (RSUs) by your employer, you have the option of making an 83(b) election. This means that you will pay taxes on the value of those stocks at the time they are granted to you, rather than when they vest. This can be advantageous if the stock’s value increases after it has been granted to you as it allows you to lower your exercise taxes. In addition, by early exercising you create other significant tax advantages:

It allows for more of your equities appreciation to be taxed at lower tax rates, as long-term capital gains or tax-exempt
Owning your shares, them being exercised v. unexercised, gives you more tax and estate planning advantages like Charitable Remainder Trusts and Grantor Retained Annuity Trusts
It starts the clock on your shares being taxed at a lower tax rate, if you own your shares for 1 year and sell them you owe the lower long-term capital gains tax rate and if you own them for 5 years and they are QSBS eligible you could avoid all taxes when selling them

Who qualifies for 83(b) election?

Employees who receive stock options or restricted stock units (RSUs) from their employer are the only ones who can make an 83(b) election. This election must be made within 30 days of receiving the stock.

What are the risks to making an 83-b election?

If the stock’s value decreases after it has been granted to you but before it vests, then making an 83(b) election may not be as beneficial because you will have already paid taxes on the lower value. However, if the stock’s value decreases after it has vested, then making this election may actually save you money because you will

What are the consequences of making or not making an 83(b) election?

Making this election is a decision you make when you receive stock from your employer. If you do not use an 83(b) to exercise your options, you will lose the opportunity to purchase the stock at its current price when granted and will only have the choice to exercise them after they have vested.

How do I make an 83(b) election?

If you want to make an 83(b) election, you must:

Notify your employer within 30 days of receiving the stock.
Send a check to your employer for your exercise costs

3. File the election form with the IRS.

An 83(b) election is a decision you make when you receive stock from your employer. It allows you to pay taxes on the stock at its current value, rather than when it vests. This can be beneficial if the stock’s value increases in the future. In this blog post, we have discussed what an 83(b) election is and who should think about making one!

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