This can provide for some valuable tax advantages. However, an 83(b) election is only available for restricted stock — not restricted stock units (RSUs) or stock options.
With an 83(b) election, the IRS will consider that you have vested the shares at the time of the grant. This means you can begin the timing for the long-term capital gains treatment and also potentially get tax savings if the stock price increases.
But to get this, you will need to make the election within 30 days of the grant. This is done by sending a letter to the IRS.
For more on this, check out the following.
OK, so let’s take an example: XYZ Corp. grants you 1,000 shares of restricted stock, with a vesting of four years. The stock price is $1 per share.
If you make an 83(b) election, then you will recognize the income now, which is $1,000. On this, the tax rate will be at your ordinary rates (this is the same as for your wages, with the maximum federal rate at 39.6%).
More than a year goes by and 250 shares vest. The stock price is now $10 but you pay the long-term capital gains rate for the sale of your shares, which is no more than 20%.
Now to see why this is so good, let’s see the alternative — that is, if you did not use an 83(b) election. In this case, you would have paid no taxes at the time of the grant. Although, when the stock vested, you would pay taxes on the $10,000 of income at your ordinary rates! Yes, this could be as high as $3,960 versus the $2,000 for the transaction with the 83(b) election.
For the most part, the 83(b) election is a good choice if the stock price is fairly low at the time of the grant — but the expectation is that there will be significant growth in the value of the company over time.
But of course, this does not imply that the 83(b) election is without its flaws. If the stock price languishes, then there is really no advantage. In fact, if the stock goes to zero, you will not be able to get a refund or deduction for the taxes already paid. What’s more, this would also be the case if you left the company before the stock vested.