83b Election for Stock options

Navigating taxes is like solving a puzzle. You piece together deductions and credits to minimize your liability while staying within the rules.

While you try to minimize your tax, it’s of the essence to know the tax codes. For Founders and employees with stock options, opting for the 83(b) election can help you save taxes. When you get your company’s shares, you usually pay taxes only when the stocks vest. However, taxes are due upon acceptance of shares under 83(b). 

You will pay fewer taxes when you opt for the 83(b) election. It’s about saving more money in your wallet, plain and simple.

83(b) election for stock options

When establishing a company, it is usual practice to distribute stock options to the founders and employees. At that point, the stock shares are worth practically nothing on the market, and the startup’s IP is its most valuable asset.

How does 83(b) election work for stock options?

If an employee receives stock options as part of their equity compensation, they can choose the 83(b) election for stock options to minimize their taxes. The main advantage of the 83(b) election is that you pay taxes on the Fair Market Value (FMV) of shares, which can increase significantly over time.

If you have decided to opt for the 83(b) election for stock option, you should file within 30 days of receiving the stock. The IRS follows this timeline strictly and cannot extend it. It is important to note that any restrictions a normal stock receives may be related to their service tenure in the company or achieving a certain performance target, which will not apply if they choose the 83(b) election for stock option.

An employee or a founder should clearly understand the stock options taxation and other tax implications related to 83(b) before choosing it, as this option is irreversible.

Benefits of filing 83(b) election

The important benefits of filing the 83(b) election for stock options include the following:

• Lower Tax Rate: Filing an 83(b) election for stock options allows you to pay taxes on the fair market value of shares at a lesser amount. If the stock appreciates over time, there is no need to pay taxes on the difference between the purchase price and the vesting amount. Your actual tax rate will decrease as a result of this.
• Simplified Tax Filing: The 83(b) election streamlines the tax filing procedure, which is an additional benefit of submitting it for stock options. If an individual chooses the 83(b) election, they will only have to pay taxes once; thus, any gain in value from their stocks won’t be a problem since they won’t have to file taxes when the stocks vest; it’s a huge time saver.

Who should consider filing the 83(b) election form?

Consider making the 83(b) election for stock options if:

• You have confidence that the stock will significantly increase in value throughout the vesting period.
• The expenses of the 83(B) stock options election (such as the strike price for options and any income tax resulting from electing them) are within your financial ability. You must pay the tax upfront when you receive the stocks. 
• At the time of grant, the market value of the restricted stock is low, or you can get options with a strike price that is near or equal to that value.
• You have a low probability of losing the stock (i.e., you don’t intend to quit the company and so lose the stock) and a good chance of realizing a profit from the sale of your shares.

What are the requirements before Filling the 83(b) Election Form? 

Before filing an 83(b) election for stock options, consider the following requirements:

• Vesting Schedule: Do you know your company’s vesting schedule? If not, understand that concept clearly. Most companies have a four-year vesting period with a year cliff (where you must wait for a portion of your shares to vest). They mainly do this to retain employees for the long term. So, if you are considering choosing 83(b) election for your stock options, ensure that your company has longer vesting periods to maximize the stock value.
• Stock Price Volatility: Stock value fluctuates over time. If you are sure your company’s stock prices will increase between the grant and vest date, choose the 83(b) election.
• Financial Situation: Remember that if you choose the 83(b) election for stock options, you must pay the taxes upfront when you receive the stock. So, consider your financial situation, as you should be able to pay the taxes on the grant date.

Factors to consider before filing 83(b) election

Below are the factors to consider before you file 83(b) election for stock options:

• Value of the Stock: When employees choose 83(b) elections for stock options, they will pay taxes on the shares at their Fair Market Value (FMV), often lower than their value when they vest. However, if the value drops when the stocks vest, the individual will have paid taxes they will never get since they cannot recover the overpayment.
• Risk of Forfeiture: Know the company’s tax requirements and the vesting timeline. Think of situations where you could lose ownership of your shares, such as quitting the company or failing to reach your goal. These factors will determine whether you can opt for the 83(b) election for the stock options.
• Timing of Tax Liability: Ideally, you would pay the taxes when you got the stock if you opted for the 83(b) election for stock options. In other words, you pay your taxes now and claim the income in the current year. Therefore, consider when you owe taxes and see if your budget can handle the expenses.
• Potential Tax Benefits: Though filing for an 83(b) election can make you pay taxes immediately, it also brings a tax advantage. In this way, you can avoid treating stock gains as regular income and instead pay taxes on them at the lower capital gains rate when you sell the stock rather than the ordinary income rate.

HOW TO EARLY EXERCISE 83(B) ELECTION FOR STOCK OPTIONS WITH EQVISTA?

When a shareholder receives stock options in Eqvista, they may exercise those options before vesting is complete. With the new 83(B) Election feature in Eqvista software, shareholders can pay their taxes on total FMV (Fair Market Value) on restricted securities (including stock options) at the grant issuance date. The FMV of your company’s shares is calculated using a 409A valuation performed by a professional expert like Eqvista. 

Early exercise your stock options on the Eqvista app before they vest, this allows you to purchase dates and recognizes the taxable value of the shares.It ensures your exercise remains tax-efficient and positions your investment for long term capital gains.

Eqvista can help you easily exercise your stock options and record all details online. This allows you to store the information in one place and share it with others without going through endless emails.

Early exercising and 83(b) elections do carry risks, such as paying taxes on shares that may be forfeited if you leave the company before vesting. Carefully evaluate your situation before proceeding.

Get your Company’s 83(b) filing support from Eqvista!

Opting for 83(b) election for stock options can help both the individual who chose it and the company. From an individual’s perspective, they can pay less taxes than those who did not opt for 83(b) election. 

For companies, an employee’s choice of the 83(b) election guarantees long-term retention with the company, at least until the stocks vest. Given its importance for both parties, filing the 83(b) election for stock options on time becomes mandatory. This is where Eqvista can help companies! With our expert support, you can easily send the filing form to your employees, and we can also help with all other necessary services. To learn more, contact us Today!