83(b) Election

What Is a Section 83(b) election?

A section 83(b) election is a tax election to include in your income the fair market value of property you have received in connection with the performance of services which you may not get to keep.

Generally, under the tax code, if you receive property in connection with the performance of services that you may not get to keep, and which you can’t transfer, you don’t have to take the fair market value of that property into income until it is determined that you will either (i) get to keep it, or (ii) the property becomes transferable.

Section 83(b) provides an opportunity for you to elect to be taxed at the time of the receipt of the property instead of waiting for the property to become transferable or no longer subject to a substantial risk of forfeiture.

Why Would You Want To Do This?

Why would you want to include in your taxable income the fair market value of property in excess of what you paid for it if you might not get to keep the property? There are a few different reasons:

  • Because the fair market value of the property at the time of receipt might be nominal–meaning, the tax might be insignificant, and an election will avoid a potentially much higher tax bill later.
  • Because the taxpayer might be paying the fair market value of the property so that electing to be taxed on its fair market value over what was paid for it means no tax is owed.
  • Because the value of the property might increase substantially and when it vests the tax on the fair market value of the property at that time might be more than the taxpayer will be able to afford.
  • Because the taxpayer might want his or her capital gains holding period start.
Example: Suppose a startup company founder is issued founders’ stock that is subject to a company repurchase at the stock’s cost, but the repurchase right lapses over a service based lapsing period.  This founder has received stock, but because the stock is subject to a substantial risk of forfeiture (the at-cost repurchase right lapsing over the service based vesting period), the founder does not have to pay tax on his receipt of the stock until it vests.  However, the founder may prefer to make a Section 83(b) election to pay tax on the value of the stock today because its value is lower than it is expected to be when it vests–or because the founder paid full value for it today, so the Section 83(b) election costs him no additional tax today.  The making of the Section 83(b) election also starts the founder’s capital gains holding period.You Do Not Have To File an 83(b) Election If Your Shares Are Fully Vested
You do not have to file a Section 83(b) election in connection your receipt of shares if those shares are not subject to vesting. If your shares are fully vested, no Section 83(b) election is required of you.

What Is The Character Of The Income?

Under Section 83(a) of the Internal Revenue Code, a taxpayer who receives property in connection with the performance of services must generally recognize as ordinary income the difference between the value of the property and the amount paid in exchange therefor at the first time the property is either transferable or not subject to a substantial risk of forfeiture. Section 83(b) allows a taxpayer who receives property in connection with the performance of services that is subject to such restrictions (e.g., nonvested property) to elect to recognize this income at the time of transfer. The principal benefit of a Section 83(b) election is that the taxpayer can lock in appreciation which is generally taxable at capital gains rates upon later disposition.

You Can’t Make An 83(b) Election With Respect To A Stock Option

It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option.  You must exercise the option first and acquire the stock before you can make a Section 83(b) election, and you would only make a Section 83(b) election in that instance if you exercised the option and acquired unvested stock (if the stock acquired on exercise of the stock option was vested, there would be no reason to make a Section 83(b) election).

Another common misconception is that Section 83 does not apply to restricted stock that is purchased at fair market value.  This is not true.  Section 83 applies even to stock that has been purchased at fair market value, if the stock is subject to a substantial risk of forfeiture and received in connection with the performance of services.  See this case, Alves v. Commissioner.

An 83(b) election has to be filed with the IRS within 30 days of receipt of the property, a copy has to be filed with the tax return of the person making the election, and a copy must be provided to the company.

Additional information about making 83(b) Election (also embedded below).

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  • Stephen Jacob

    I have some fully vested ISO options that I’m planning to exercise. I find the information provided by the IRS to be rather impenetrable with respect to the 83(b) election form. I can’t figure out whether I need to file the form to document that I’ve purchased the stock and that it is *not* subject to forfeiture (since it’s fully vested) or whether I simply don’t need to file the form. Do you know if there is some specific section/document that might make this clear?

    • Anonymous

      If they are fully vesting options–and you should confirm then–then no 83(b) election is required, because you only make 83(b) elections with respect to stock you receive that is subject to service based vesting conditions. But–have a lawyer or tax advisor review the docs for you, and confirm with your company’s CFO or whoever administers the plan that you are fully vested with respect to these shares.

      • Stephen Jacob

        Thanks, Joe! Actually, the reason I’m exercising these options now is that they’re about to expire (nobody talks about the 10 year expiration on ISO options because nobody works at a start-up for over 10 years, right? Apparently not nobody, but not many of us). All of the options I will be purchasing finished their vesting schedule back in 2005. :)

        • Anonymous

          Yeah, it is funny how that 10 year term seems like forever when you put it down in paper for a startup–it seems like forever! Good luck!

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  • markgavagan

    Do I have this right? If I own 100% of the stock outright in a private startup corporation (i.e., the beginning value is $0), there’s no need for an 83(b) election.

    Thank you.

    • joewallin

      If you are full vested, the shares not are subject to a risk under 83b, then no 83b election is required. But you should confirm your documents don’t subject your shares to a risk of forfeiture under 83b with your lawyer or whoever prepared the documents. This does not constitute legal advice. Happy to talk to you on the phone. 206 757 8184

      • markgavagan

        Thank you! I appreciate your response and all the good ideas on your blog. -Mark

  • Matt

    If an ISO results in no tax being paid on the spread between market value and exercise price at the time of exercise, then why would you also file an 83b? It seems as if an 83b accomplishes that as well. Thank you.

    • joewallin

      Not sure I am following your question. Generally, immediately exercisable ISOs are not advisable. So, generally speaking, you would not be exercising an ISO except for vested portions–and no 83b is required for vested portions of an exercised option.

  • Keith

    I received a grant of 4,000 shares common stock plus additional 6,000 restricted shares that vest over the next 1.5 years. So, do I need to file an 83b only on the restricted shares? I expect to leave the company before the 6K shares vest, so then it appears I don’t need to file the 83b? Also, how do I establish fair market value? It’s a small company and mgt. says they can’t give me guidance on the value, so can I use $0.10/share?

    • http://startuplawblog.com/joewallin Joe Wallin

      How long ago did you receive the shares?

  • Seamus

    I received stock options from my employer upon acceptance of the job. I received X amount of shares, 4 year vesting period. 25% vests after 1 year with the company, the remaining 75% distributed monthly for the following three years. My employment started April 2nd, 2012. In September, we were acquired for an extremely favorable amount by another private company. They purchased our shares out right, no conversions, with all vested stocks paid just weeks after the acquisition. My employer provided an 83b form and advised signing it, so I did and promptly submitted. I have no vested stock until April 2nd, 2013. I am wondering how signing the 83b will effect me. I am also wondering if my gain is recognized in my W2 already. Thanks!

  • adam w

    So you say NOT to file an 83b if you exercise only vested options from a private company. If that’s the case, then what DO I need to do come time to file my return?

    • http://startuplawblog.com/joewallin Joe Wallin

      If these are ISOs, you will want to know the spread on exercise so you can calculate your AMT.

    • StephenJacob

      I did precisely this in 2011. I exercised options (ISOs) in my (still privately held) company. I paid $0.01/share. The valuation (“409A valuation”, I believe) of the stock when I exercised was $0.05/share. So I made a gain of $0.04/share for AMT purposes.

      Since all of the options I exercised were fully vested, an 83(b) was not required (actually, see below where I asked about this). Indeed, it wouldn’t even make sense.

      The point of an 83(b) election is to recognize your AMT gain at time of exercise instead of the default (if you do not file an 83(b) election) of as the shares vest. In *theory* I suppose you might want to opt _not_ to make an 83(b) election if you did not want to have a large AMT gain this year … but you risk a larger overall AMT gain (later) if the valuation of the shares is higher when they later vest. *If* your options are already fully vested, there would be no difference between the default (time of exercise) and an 83(b) election (time of exercise).

      Either way, though, your gain on shares you have exercised but have not sold (or is that “cannot yet sell”?) is an AMT gain only, not a regular capital gain.

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  • Elliot

    I received a grant of stock earlier this year valued at $20k, and filed an 83(b). I left the company a month ago (same calendar year), and 75% of the stock grant will now be forfeited back to the company. I know that in general I need to pay tax on the full $20k worth of stock even though I’m only keeping $5k worth. Is there any exception if I notify the IRS that the stock is being taken back within the same calendar year that it was granted?

    • http://startuplawblog.com/joewallin Joe Wallin

      Elliot, I don’t know if there is but given the end of year is closing I would encourage you to meet with tax counsel right away.

  • rs

    Joe, I had a big firm help me issue stock when we got our first big ($1.5M) investor–I vested several advisors with stock for their services and promised to issue shares later. A year and a half later I issued the stock at a nice valuation—but the letters I gave to the advisors on their “vested” % of the company were done at times of varying valuation ($2M to $4.5M and later more for investors). We are having a hard time getting a clear answer on tax treatment—and I feel I have been brutally failed by the large national law firm–we asked questions–got soft answers and went forward. I have one person who will look like they have $150K of shares in exchange for work for hire, and others with $40K of shares for services. Since they are not tradeable assets do we discount the tax liability if so where and when—do I issue 1099s to make this look like compensation given to advisors.
    Do you have any advice?
    RS

    • http://startuplawblog.com/joewallin Joe Wallin

      I am happy to try to help. Want to call me at 206 757 8184?

  • w

    My company just offered me 5000 shares of restricted stock with a fair market value of $0.90 (example values), vesting over time. In addition to the paperwork to sign for receiving the shares, they included a pre-filled 83(b) form that lists the fair market value as $0.00 (not an example value!) and the amount I paid for it at $0 (which is correct).

    Is that okay for them to say that the fair market value is $0?

    Extra info: We are a small startup, and I know the $0.90 value was used recently with regards to (successfully) obtaining new funding. That $0.90 value is not included anywhere in restricted stock agreement itself.

    Thanks in advance

    • http://startuplawblog.com/joewallin Joe Wallin

      I don’t think you can list zero as the value. Happy to discuss on the phone. 206 757 8184.

    • StephenJacob

      Unlike Joe, I am not a lawyer, so take what I say with a pinch of salt, but … that sounds very fishy indeed to me.

      Unless the company sold all its assets and then bet the resultant cash on red (and lost), I don’t think stock _can_ be valued at $0.00. As long as the company is worth _anything_, the stock must (consequently) be worth something.

      A pre-filled 83(b) sounds odd, and I fear for other employees who may have believed it and purchased stock and filed taxes based on the assumption. :/

      I will say, I don’t think the value of the stock has to match the price the most recent investor paid for it. If I understand correctly, they might have paid above the odds for preferred shares or for the right to buy in to a company which needed motivation to accept the funding. But if investors paid $0.90 I would guess your stock must have a value of at least a decent fraction of that.

      It screams “AUDIT!” to me.

  • Scott

    My issue is that I have already (and mistakenly) filed an 83(b) election for vested shares. Is this something that I need to go through the IRS to revoke? Or since it was an unnecessary form, will it just be invalidated and not require any action from me?

    • http://startuplawblog.com/joewallin Joe Wallin

      When you filed the form, did you indicate that the value of the shares you received was the same as the price you paid?

      • Scott

        Yes, I did.

        • http://startuplawblog.com/joewallin Joe Wallin

          I think most tax accountants and lawyers would tell you it is a harmless error if there was no income to report, because you reported that the value you received was equal to what you paid for the property. Perhaps another member of the community here will chime in if they disagree. You could also post this question to Quora to see if anyone disagrees. Standard disclaimer–this doesn’t constitute legal or tax advice.