The short answer is no. Tax code Section 83(b) (and the associated election) is only important for stockholders who receive unvested shares but want to be taxed up front as though the shares were all vested. Let’s take a step back and review some concepts.
BASIC TAX PRINCIPLES
There are several different types of tax rates in the US, including ordinary income rates and long-term capital gain rates.
Ordinary Income is the catchall category for any income that is not treated as long-term capital gains. This usually includes income from employee wages, bonuses, tips or other compensation, including equity. The ordinary income rate a taxpayer must pay is based on their total income and can be as high as 39.6%.
Capital gain, is any gain from the sale or exchange of a capital asset, such as stock, bonds or real estate. When the asset is held for less than one year before being sold, it’s categorized as “short-term capital gains” and taxed at ordinary income rates. However, when a capital asset has been held for more than a year before being sold, it is taxed at a lower “long-term capital gains” rate, which can be as high as 20%. (Keep in mind that an ISO stock grant must be held for 1 year from the date of exercise and 2 years from the date of the option grant, to be taxed at the lower long-term capital gains rate.)
TAXES AND STOCK/OPTION GRANTS
Other than an ISO option grant, which gets special tax treatment, all other types of stock or option grants are subject to tax when exercised or purchased. Taxes are generally imposed on the difference between the exercise or purchase price of any vested share and the fair market value of the vested stock on that date. When shares are subject to vesting, the IRS treats each vesting milestone as a taxable event. In other words, every time shares vest (i.e. at the cliff and each month after for standard vesting) ordinary income tax must be paid on the “spread,” or the difference between the exercise or purchase price and the fair market value on the date the stock vested . This is a tiresome and sometimes difficult task, not to mention expensive.
Later, when the stock is sold any gain will be taxed at the applicable capital gains rate depending on whether the gain is categorized as short-term or long-term.
Under Section 83(b) of the tax code, the IRS allows a recipient of restricted stock (i.e. stock subject to vesting) to file an 83(b) election in connection with the purchase or exercise of the stock, which allows all vested and unvested shares to be taxed on the date of purchase. If this form is filed with the IRS within the strict 30-day timeframe after purchasing shares, taxes will only have to be paid on the stock once, rather than at each vesting date. Additionally, within that 30-day window, the fair market value of the stock should be equal to the purchase or exercise price, such that the spread should be zero. This is a huge boon for employees holding stock subject to vesting, since it usually results in zero tax liability up front for the whole grant.
So what is an 83(b) election and how does it work? An 83(b)election is essentially a letter that is sent to the Internal Revenue Service asking that a restricted equity grant be taxed all together on the date the equity was granted, rather than each time the equity vests. Check out Paysa’s equity guide for an example of how this works.
If you are granted an NSO or a direct stock grant and the stock or options are restricted, i.e. subject to vesting, the bottom line is you should probably file an 83(b) election within 30 days after the purchase of your stock. However, it’s always a good idea to get advice from a personal tax advisor or attorney before taking this step.
Nothing herein is intended as tax or legal advice and is for informational purposes only.