Who Needs to File an 83(b) Tax Form?

Who Needs To File an 83(b) Tax Form?

Who Needs to File an 83(b) Tax Form?
Taxes have become increasingly complicated for high earners. We’re here to provide all the facts you need to clarify the 83(b) tax form and help you avoid any negative surprises.

Everyone needs to pay their dues to Uncle Sam. But if you receive equity as part of your compensation package, you may be able to fast-track your income tax and file an 83(b) form to prepay taxes (and potentially minimize taxable income) on stock awards or stock purchases that are subject to vesting.

Tip: For straightforward financial advice, click here to explore and sign up for more of our expertise on a variety of topics in various formats.

What Is the IRS 83(b) Form?

The IRS 83(b) form is used to report the early exercise of stock options that are subject to vesting at a later date. More specifically, it allows you to choose to be taxed on the fair market value (FMV) of the stock at the time it is granted rather than when the stock vests. Filing an 83(b) may allow you to minimize the taxes you will owe on the stock in the future.

“Exercising the option” simply means purchasing shares of the stock at the price specified in your contract (the “exercise price”). There are several ways to do this: You may choose to pay for the shares in cash, take out a loan to pay the cost, swap existing shares or use some of the exercised stock itself to cover the cost of the purchase (a “cashless” exercise).

Filing an 83(b) form is an important step that may lead to significant tax savings. Consider this: If you do not file 83(b) and the stock’s FMV rises between the time of granting and of vesting, you’ll owe long-term capital gains taxes to the IRS when the stock vests.

Who Needs To File an 83(b) Tax Form?

Individuals who have received a restricted stock grant from their employer can consider filing an 83(b) tax form. This form must be filed with the IRS within 30 days of receiving the restricted stock grant.

Let’s be clear: Filing an 83(b) form is optional. But if you receive a stock grant, the 83(b) form allows you to pay the taxes on unvested options and stock for nonqualified stock options (NSOs), incentive stock options (ISOs) and restricted stock awards (RSAs). Note: This form is not applicable to restricted stock units (RSUs).

  • For NSOs and ISOs:
    • File an 83(b) form within 30 days of exercising your option
    • This is only for options that can be exercised early (i.e., they are not vested when exercised)
  • For RSAs
    • File an 83(b) form within 30 days after stock is granted to you
    • Pay taxes on the FMV of stock at the time of grant instead of vesting

The 83(b) election is intended to inform the IRS that you want to be taxed on the value of the stock at the time it is granted, not when the restrictions on the stock lapse.

Tip: Interested in maximizing your equity compensation? We highlight four helpful tips in a recent blog post. Click here to read now!

Aren’t Tax Rates Higher on an 83(b) Election?

Yes, initially. By making an 83(b) filing, you are subject to income tax rates. If you choose not to file form 83(b), you face capital gains taxes, rather than ordinary income taxes, once you sell your shares.

Let’s look at a hypothetical example of how this may work in your favor: Let’s say you receive 100,000 shares that are eventually going to vest. Each share is worth $0.02 when granted. This rises to $2.00 each upon vesting and hits $10.00 per share when you sell a year-plus down the road. For this example, we’ll assign you the maximum income tax rate (currently 37%) and long-term capital gains tax (20%).

83(b) Election Example: You elect to file an 83(b) form within the requisite 30 days, when the value of your shares totals $2,000. A 37% income tax rate means you owe the IRS $740 ($2,000 x 37%). Filing an 83(b) election means you only pay taxes when you’re granted the shares, not when the shares vest. When you sell the shares more than a year after the stock was granted, you’re hit with a gain of $9.98 per share (not $10.00 since you already took $0.02 per share in income). So, then there’s an additional tax charge of $199,600 ($998,000 x 20%). Once taxes are all said and done, your profit is $799,660, or $1,000,000 minus $740 minus $199,600.

Compared to If You Don’t File: You pay nothing upon the (unvested) stock option’s grant. Upon vesting, you realize $200,000 of income, thereby facing a $74,000 tax bill on income taxed at the 37% income tax rate. When you sell a year-plus after vesting, you face a taxable gain of $8.00 a share (not $10.00 since you’re already credited for the $2.00 per share taken in income). In this case, you’ll pay additional taxes of $160,000 ($800,000 at a long-term capital gains tax of 20%). Your total after-tax gain? $766,000 ($1,000,000 minus $74,000 minus $160,000).

In this case, filing an 83(b) form was worth more than $30,000 to your eventual bottom line.

What Happens if You Don’t Make an 83(b) Election?

If you don’t elect to file an 83(b), you may lose out if the FMV of the shares increases by a large amount between the grant date and vesting date.

But 83(b) filings aren’t a no-brainer or without risk. If the assets plunge in value or end up worthless, you’ve paid taxes on value that never materialized.

And there’s also this: Because the share price upon your grant date is the basis for your taxation, you might think you could claim a capital loss if you later give up the shares or sell them at a loss. But no; if you file an 83(b) election, you can only claim a capital loss based on what you paid for the shares out of pocket.

Tip: Check out our comprehensive resource, Executive Compensation Benefits, Plans & Structure.

Steps to 83(b) Filing

An 83(b) form can appear intimidating, but the actual paperwork is straightforward. Follow these steps to file:

  1. Get a copy of the 83(b) form from the IRS website or your employer.
  2. Complete the top portion of the form, including your name, address and Social Security number.
  3. Find the section of the 83(b) form that asks for information on the property being transferred and provide a straightforward description of the assets transferred. This includes the number of shares, the date they were transferred and their FMV on that date.
  4. In the section of the form where you request the election, clarify that you’re making an election under Section 83(b) of the Internal Revenue Code.
  5. Sign and date the form. Make copies for yourself and to provide to your employer.
  6. Mail the original 83(b) form to the IRS within 30 days of the transfer.

Remember, income is measured between the purchase price and the FMV on the day of award or early exercise.

Simplify Filing Your IRS 83(b) Tax Form

At Adviser, we specialize in comprehensive financial planning and tax strategy for high earners, including those with restricted stock options and other equity compensation.

By following the steps above, you can make sure you are filing appropriately. But there can oftentimes be some complex decisions to make—and since an 83(b) election is irrevocable, you want to get it right. You can’t change your mind once the filing has been made.

Your 83(b) filing may be complicated by your specific needs or tax picture, and you may benefit from partnering with our experienced financial and tax planning team. For more on our services, please click here. We’ll provide peace of mind about the decision-making process and help you maximize your equity and minimize your tax bill.  

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

© 2023 Adviser Investments, LLC. All Rights Reserved.