We all know the reasons to elect for 83(b). Just to summarize the positive aspects of filing an 83(b):
You pay tax upfront upon equity grant rather than at the time the stock vests
This means that if a share is worth $10 at the time that it vests, you are only paying tax on a fair market value (FMV) of $10.
When you sell the shares at $100 a few years down the road (assuming the share has went up in value tenfold), you are paying capital gains tax on the $90, which is only 20% at the maximum (plus a possible 3.8% additional investment tax on high-income individuals)
Without this election, the taxpayer would be paying ordinary income taxes on the FMV of the shares at the time that they vest. This means that, in cases where the shares have increased substantially, you are paying the ordinary rates of up to 37% for federal (under the 2018 tax laws). Clearly, the difference between 20% capital gains and 37% ordinary income tax rate makes it beneficial to file the 83(b)
Here is a great article about this.
However, what if the share price does not continue to increase? What if you end up paying taxes on a $10 dollar share valuation at the time of grant (and therefore go largely out of pocket) only to have the share vest down the road at the same value? Then you effectively paid the exact same rate of tax, all else held equal.
What if you quit or get fired before all the shares have vested? Let’s say that you have a 4-year vesting period and you are fired 2 years into this period. In an 83(b) election scenario, you have paid tax on shares that you effectively do not own. You have overpaid taxes on assets that were granted but were never vested and you have no recourse, according to this article (see page 2).
Let me point out that my first instinct as a practitioner was to attempt the section 1341 “claim of right doctrine” for the overpaid tax. It appears this has already been tried & has failed
The 83(b), at first presented as a no-brainer by the first-linked article in my blog (and many many others online), may not be the correct choice. This is surprising as the entire tech community seems to immediately elect this. It was not until we analyzed this in light of a client in a financial firm faced with this decision that some of these issues started to come out.
The financial firm referenced had relatively flat share price over time with large variations in share price in between. If there is a steady increase in share price, the 83(b) may make sense
The financial firm has turnover and regulatory issues that are unpredictable. This means that employment may not be guaranteed, which brings up the secondary concern of leaving prior to full vesting of shares that you have paid tax on at grant in an 83(b) election scenario
Therefore, if one is not confident in the increase in the share price and their employment at the company, it may not make the most sense to make this election
Any feedback, comments, and experience of others is highly appreciated as this is a topic with many opinions online and few actual real-life examples being spelled out in numerical terms. If any clients or prospective clients would like to hire us to go through these considerations in light of their individual case, we are happy to analyze accordingly. Email at firstname.lastname@example.org
Thank you for reading.