83(b) Election
83(b) Election
Note: This Insight was first published on the Chatterjee Legal website on 27 September 2021.
Key Takeaways
83(b) elections are used to pay taxes on grants of certain kinds of equity at time of grant.
83(b) elections need to be filed with the IRS within 30 days of grant.
83(b) elections are not necessary for grants of options.
Full Text
For startups and other companies issuing equity subject to vesting restrictions, familiarity with the 83(b) election is essential. Individuals receiving equity subject to vesting or certain other restrictions may want to file an 83(b) election in order to pay taxes on such equity at time of grant, when its value is likely to be relatively low, or lower than it may be in the future.
Codified under 26 U.S. Code § 83, the “election to include in gross income in year of transfer” is a provision of the US Internal Revenue Code which allows the grantee of equity subject to vesting or similar conditions the ability to pay taxes on the total fair market value of such equity at the time of grant, rather than upon vesting, because the holder of such equity has a “substantial risk of forfeiture” of the same. A startup attorney will be able to advise on matters of vesting of grants and what may constitute a “substantial risk of forfeiture.”
The key thing to note here, however, is that 83(b) elections must be filed with the IRS within 30 days of the issuance of the underlying equity, regardless of when it vests.
It’s also crucial to note that 83(b) elections apply only when there’s a substantial risk of forfeiture of the equity, e.g. vesting, repurchase restriction, etc. Furthermore, it’s important to note that an 83(b) election is not necessary for grants of options, though it may become relevant at time of exercise should the underlying equity still be subject to the aforementioned “substantial risk of forfeiture.”
Though a startup attorney can be a great resource, when considering issues related to the US Internal Revenue Code, the 83(b) election, or tax matters generally, it is generally advisable to also consult with a Certified Public Accountant (CPA) or other tax professional.
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