Section 83(b) Election

Section 83(b) Election

A tax filing within 30 days of grant that allows employees granted stock to pay taxes on the grant date instead of on the date restrictions lapse. If an employee files the election, taxes are based on the fair market value on the grant date, with any future appreciation taxed as a capital gain. If the employee does not file an election, taxes are based on the fair market value on the date the restrictions lapse, which will be higher assuming the stock has appreciated in value.

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Section 83(b) Election

When one receives restricted stock, a decision to pay taxes on the value of the stock in the year and value at which it is received, rather than when it vests. Many executives receive restricted stock as part of their compensation. It may vest years later when the stock is trading much higher. If one does not make a Section 83(b) election, one must pay taxes on the stock when it vests, which can result in a much higher tax rate. A Section 83(b) election, on the other hand, means that the stock is treated as if it vests immediately, which results in higher taxes in the short-term but possibly much lower taxes in the long-term. A Section 83(b) election must take place within 30 days of receiving the stock.