When you receive a grant of restricted stock (or if you receive restricted stock upon an allowed early exercise of stock options), you can elect to be taxed on the value at grant instead of vesting. This move is known as a Section 83(b) election, named after the relevant section of the Internal Revenue Code (IRC). It is not available for a grant of restricted stock units, as RSUs are taxed under a different part of the IRC.
The advantages to making the election are: (1) you start the capital gains holding period early, i.e. at grant rather than at vesting, and (2) you are taxed for ordinary income purposes on the grant value, which will hopefully turn out to be lower than the value later at the time of vesting. It is crucial to note that rescinding or canceling a Section 83(b) election is virtually impossible once it has been made.
Strict rules dictate when this filing has to be made (e.g. within 30 days of the grant), how it needs to be filed, and what should appear in it.
You make the election by sending the appropriate information to the IRS office where you file your tax return (you also send the election to your company and file it with your annual tax return). The necessary information includes:
- your name, address, and Social Security number
- a description of the property/shares (e.g. X shares of my company) and the fair market value
- the date on which you received the shares and in what taxable year
- the restriction that will cause forfeiture if its requirements are not met or the restriction that will lapse when vesting requirements are met
- any money paid for the stock
Despite the fact that the filing must include specific information about the property (i.e. shares), such as its value and transfer date, the IRS has no form for the Section 83(b) election. IRS Revenue Procedure 2012-29 presents a sample of acceptable language for making the election. It also provides examples showing the election's tax impact when the stock is later sold after vesting or if the grant is repurchased or forfeited before vesting. The examples confirm a major risk with the Section 83(b) election: should the shares never vest, the forfeiture does not give you a tax credit or deduction for the taxes you paid up front. As indicated by the examples, only if you paid something for the restricted stock, as can happen with early-exercise options in a private company, might you have a capital loss for the difference between any repurchase price and what you paid for the stock (i.e. the exercise price).
Choosing whether or not to make the 83(b) election is a financial-planning decision. For guidance on the analysis needed to determine whether it makes tax and financial sense, see the articles in the section Restricted Stock: Section 83(b) at myStockOptions.com.
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