What Is a Section 83(b) Election?

What Is a Section 83(b) Election?

A Section 83(b) election is a tax election that allows a startup founder to include the fair market value of equity received in connection with the performance of services even though the equity is subject to vesting. The 83(b) election is not applicable if the equity is fully vested upon grant.

Why File an 83(b) Election?

There are several reasons to file an 83(b) election, including:

• The equity was granted when the value was nominal.
• The equity is expected to increase substantially in value during the vesting period.
• To begin the capital gains holding period.
• The founder intends to pay fair market value for the equity, so no tax would be owed.

Making an 83(b) Election

A Section 83(b) election is made by sending a letter to the Internal Revenue Service (IRS) requesting to be taxed on the date the equity was granted or purchased rather than on the scheduled vesting dates. One copy is sent to the IRS, the founder keeps a copy for his or her records, and a copy is given to the company. The election should be sent to the IRS via certified mail with a return receipt requested or by other trackable form of mail, and the founder should keep evidence that the IRS received it. Note that an 83(b) election must be filed within 30 days of the date of grant to be effective; the IRS will not accept late filings.

When Does It Not Make Sense to File an 83(b) Election?

The vast majority of the time it makes sense to file a Section 83(b) election when the restricted equity is worth a nominal amount (e.g., $0.01/share or less). However, if a founder were to receive 100,000 shares of restricted equity worth $1.00 per share, it would immediately cause a taxable event costing thousands of dollars. If the company fails before the equity vests, the founder cannot recoup the taxes paid in connection with the initial grant. As a result, he or she would likely have been better off not to have filed the Section 83(b) election.

A tax adviser can provide further guidance on what an 83(b) election is and whether it is appropriate for any specific circumstance.

For more information, please contact a member of our New Ventures group.