Maximize Your Tax Savings: How, Why & When You Should File a Section 83b Election

Are you looking to maximize your tax savings and take control of your financial future? Then you need to learn about the powerful tool known as the Section 83b election.

In this comprehensive guide, we will explain what a Section 83b election is, when and why you should file one, and how to do it properly. Whether you are a small business owner, a startup founder, or simply someone looking to save on taxes, this article has something for you.

Keep reading to learn more and start saving on your taxes today!

The Section 83b election is a tax election that allows you to start paying taxes on the fair market value of restricted stock on the date you receive it, rather than when the restrictions lapse. 

If you are an early stage startup employee, you are probably familiar with restricted stock units (RSUs). RSUs are a form of compensation that companies use to reward employees. Unlike stock options, which give you the right to purchase stock at a set price in the future, RSUs give you the right to receive stock in the future.

Section 83b Election Explained

• If you make an 83b election, the terms state that you pay taxes on the value of the stock on the date you receive it, even though you may not be able to sell the stock until some future date. 
• The advantage of making the 83 b election is that you pay taxes at the lower capital gains rate on the stock’s value at the time you receive it, rather than at the potentially higher ordinary income tax rate when the restrictions lapse. 
• If you don’t make the 83b election, you don’t pay any taxes on the restricted stock when you receive it. But when the restrictions lapse, you pay taxes at the potentially higher ordinary income tax rates on the stock’s value at that time.

The main difference between RSUs and stock options is that with RSUs, you do not have to pay anything to receive the stock, while with stock options, you have to pay the strike price to purchase the stock. One of the major benefits of RSUs is that you do not have to pay taxes on the stock when you receive it. Instead, you pay taxes on the stock when you sell it. This can be a major benefit if the stock price goes up after you receive the RSUs.

However, there is a downside to this tax treatment. If you hold the stock for less than one year after you receive it, you will pay taxes at your ordinary income tax rate, which could be as high as 37%. To avoid this, you can file a Section 83(b) election.

A Section 83(b) election is an irrevocable election that you file with the IRS within 30 days of receiving your RSUs. When you file a Section 83(b) election, you are essentially electing to be taxed on the stock at the time you receive it, rather than when you sell it. This means that you will pay taxes on the stock at your capital gains tax rate, which is currently 20%.

If you hold the stock for more than one year after you receive it, you will pay the lower capital gains tax rate. However, if you sell the stock before you hold it for one year, you will pay the higher ordinary income tax rate. Therefore, you should only file a Section 83(b) election if you are confident that you will hold the stock for more than one year. If you are not sure, you should consult with a tax advisor.

An Overview – What Is a Section 83(b) Election?

An 83(b) election is a way for newly hired employees to minimize their tax liability when they receive stock options or restricted stock units (RSUs) as part of their compensation income.  It is also very common for startup founders to receive a substantial amount of restricted stocks as well.

• When an employee receives stock options or RSUs, they are typically subject to vesting period, which means they cannot sell or access the shares until a certain date in the future.
• However, if the employee makes an 83b election, they can pay taxes on the stock at the time they receive it, rather than waiting until the stock vests. 
• This can be advantageous because it allows the employee to lock in a lower tax today, especially if the stock increases in value over time. 
• Normally RSUs will be taxed as they are received and the stock vests.  An 83b election instead allows you to pay tax on the restricted shares now, at their lowest value.  And capital gains taxes as the stock price appreciates in value and is eventually sold.

There are some term restrictions on who can make an 83b election. For example, the employee: 

• must have received the stock options or RSUs within 30 days of starting their job 
• and they must make the election within 30 days of receipt of the stock. 
• Additionally, the election must be made in writing and filed with the IRS. 

If you are a newly hired employee who has received stock options or RSUs, you should speak with your financial advisor and tax advisor to see if an 83(b) election makes sense for you.

Who Is Eligible For a Section 83b Election?

• A section 83b election is available to any person who receives ‘property’ in connection with the performance of services. And has a vesting schedule to receive the stock.  The vesting schedule is key.
• The election must be made within a period of 30 days of the property being transferred, and it must be made in writing to the IRS. 
• The election is made by filing a Form 1040, and attaching a statement that includes the following information: 

What Information Do I Need to File a section 83b election?

1. The name, address, and social security number of the person making the election; 
2. A description of the property; 
3. The date the property was transferred; 
4. The fair market value of the property on the date it was transferred; and 
5. A declaration that the person making the election understands the consequences of the election. 

The purpose of the election is to elect to treat the property as if it were received on the date it was actually transferred. The election is available for any type of property, but it is most commonly used in connection with stock options.

Why Make a Section 83 b Election?

There are a few key reasons why someone might make a section 83b election. 

• The first is to avoid paying taxes on the appreciation of the property. If the property appreciated in value over time, and the individual made a section 83(b) election, they would only pay taxes on the initial value of the property, not the increased value. This can be helpful in cases where the appreciation is significant. 
• Another reason to make a section 83b election is to get a “fresh start” on the property. This is especially beneficial if the property was acquired at a discount (i.e. through an employer stock option). By making a section 83b election, the Individual can immediately start paying taxes on the property’s full value, rather than its discounted value. This can result in a lower tax bill in the long run. 
• Finally, making a section 83b election can help hedge against future tax increases. If the individual believes that tax rates will go up in the future, or at least their personal tax bracket, making a section 83b election can help minimize the amount of taxes paid on the property’s appreciation. 

When Can You Make an 83(b) Election?

An 83b election is a way for newly hired employees to minimize their tax liability, commonly on stock options or on restricted stock units (RSUs). Under the current tax laws, RSUs are taxed as ordinary income when they vest, which is typically when the employee becomes entitled to the stock. 

However, if the employee makes an 83b election, they are taxed at the time of purchase, which is typically when the stock is first issued. This can be a significant advantage if the stock price goes up, because the employee will only be taxed on the purchase or strike price, not the higher value at vesting. 

There are a few key things to keep in mind if you’re thinking about making an 83(b) election: 

1. You must make the election within 30 days of receiving the stock. 
2. You will be required to pay taxes on the stock at the time of purchase, even if it is non vested shares and may not be worth anything at that time. 
3. If you do not make the election, you will be taxed at the time of vesting, which could be at a higher rate if the equity price has gone up. 
4. Once you make the election, it is irrevocable. 
5. You should speak with a tax advisor before making the decision, as it may not be advantageous in all cases.

Is Making a Section 83 b Election a Good Idea?

A section 83 b election is a good idea if you are confident in the future success of the company stock you are working for and you believe the stock will appreciate in value. This election allows you to pay taxes on the stock at its current value, rather than waiting for it to vest and paying taxes on the difference between the current value and the vesting price. 

• This can save you money in the long run if the equity price goes up, as you will only pay taxes on the stock’s current value rather than its value at vesting. 
• However, if the stock price goes down, you will end up paying more in taxes than you would have if you had waited to make the 83(b) election. Therefore, it is important to carefully consider the future stock prices prospects before making this election.

FAQs For 83b Elections

How Do I Report an 83(b) Election on My Taxes?

If you make an 83(b) election, you report the income in the year you receive the stock. You’ll need to file Form 83(b) with the IRS. 

This is how it works: 

• Let’s say you receive 1,000 shares of stock on January 1, 2023 that have a fair market value of $10 per share. 
• You make an 83(b) election and pay taxes on $10,000 of income. 
• Then, on December 31, 2023, the stock is worth $15 per share. You’ve now realized a $5 per share, or $5,000, gain. 
• You pay taxes on that gain when you sell the stock, but not until then. 

Making an 83(b) election can be a good idea if you think the equity is going to increase in value. You’ll pay taxes on the income upfront, but you’ll save money in the long run because you won’t have to pay taxes on the appreciation each year.

Instructions for Completing IRS Section 83(b) Form

What Are The Steps to File a 83b Election

There are a few basic steps that must be followed in order to file a 83(b) election. 

1. The first step is to notify the IRS that you are making the election by filing a form with them within 30 days of the date or time of the transfer. 
2. I personally suggest you send the IRS 2 copies.  One for the IRS to keep, and a second for them to stamp and send back to you for your records.
3. The next step is to file a copy of the 83b  election with your employer. 
4. The last step is to keep a copy of the 83b election for your records.  Maintain a copy of your election with your ownership records as well.  It’s a good idea to keep a digital copy as well, stored in the cloud.

When Do I Send in My 83(b) Election to The IRS?

• First, you must be absolutely certain that you want to own the property in question – once the election is made, it cannot be undone. 
• Second, you must be aware of the tax implications of the election – while you will save money in the long run, you will have to pay taxes on the property’s current value upfront.
• Finally, you must make sure to file the election with the IRS on time – if you miss the 30-day window, you will not be able to make the election at all. 

If you are considering making an 83(b) election, be sure to consult with a tax professional to ensure that it is the right decision for you.

Do You Need To Attach 83(b) Election To Tax Refund?

You do not need to attach the 83(b) election to your tax refund, but you will need to keep it with your records in case you are audited. The election can be made on paper or electronically, but you will need to have it in order to make the election.

Where Do I Send My 83 b Election? How Do I Send Certified Mail To The IRS?

• It is a best practice to send your 83(b) election form to the IRS via certified mail with a return receipt requested.
• Include a self addressed stamped envelope for them to return your stamped copy as well.
• Check the irs.gov website for Where to File Paper Income Tax Returns With or Without a Payment. Mail to the “not enclosing a payment” address.
• Once you have the correct address, you will need to put the item you are sending in a certified mail envelope. You will then need to take the envelope to your local post office. At the post office, you will need to pay for the certified mail service. The post office will then give you a receipt that you will need to keep for your records. 
• Once the IRS receives your certified mail, they will process it and respond accordingly. Be sure to keep a copy of the receipt and any correspondence you receive from the IRS for your records.

Can You File an 83(b) Election Electronically? Can You DocuSign an 83 b Election?

There is a lot of confusion surrounding the 83(b) election, with many people wondering if it can be filed electronically. The answer was yes, you could file an 83(b) election electronically

• On April 15, 2021, the IRS extended accepting electronic filing for 83(b) elections. You could use electronic signatures when signing your forms. The electronic filing process allows individuals to file 83(b) elections using smart devices. BUT, that extensions expired on December 31st, 2021

Keep in mind, however, that it is always best to consult with a tax advisor to make sure that you are taking the proper steps in order to file your 83(b) election correctly.

You can no longer Docusign an 83b election form.  The extension ended on December 31st, 2021

How Do I Know If The IRS Received My 83 b?

There are a few ways that you can check to see if the IRS has received your 83(b) form. 

• The first way is to check the status of your tax return online. You can do this by logging into your account on the IRS website. If your 83(b) form has been received, it will be listed under the “Additional Information” section. 
• Another way to check is to contact the IRS directly. You can do this by calling 1-800-829-1040 and asking for the status of your 83(b) form. If you filed your 83(b) form electronically, you should receive an email from the IRS confirming that they have received it. If you filed your form by mail, you should receive a letter from the IRS within a few weeks confirming that they have received it.

• State Capital Gains Tax
• California Capital Gains Tax Rates
• Florida Capital Gains Taxes
• TN Capital Gains Tax
• Washington State Capital Gains Tax

Conclusion

An 83(b) election is an election made by an employee to include the fair market value of restricted stock granted to them on the date of grant as taxable income.

An 83(b) election is an election made by an employee to include the fair market value of restricted stock granted to them on the date of grant as taxable income.

This election is made in order to avoid paying taxes on the stock when it is eventually sold, and is only available for stock that is subject to vesting.

Raymond James: Is an 83(b) Election Right For you?

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.