Let's examine the tax benefits and risks of choosing an 83(b) Election.
83(b) Election is an election under Section 83(b) of the U.S. Tax Code to accelerate the taxation of restricted stock (restricted stock) to the time of acquisition. This avoids taxes on future appreciation in the value of the stock. Many startup companies are assigned a certain period of employment, called the Vesting Period; now, you can acquire the stock at fair market value and pay regular income tax. With this election, however, you do not have to wait for that period and can pay taxes using the market value at the current time.
Specifically, you pay income tax based on the stock's fair market value (FMV) at the time you acquire it, and any subsequent increase in value is subject to capital gains tax when you sell it. We take advantage of the lower and more favorable capital gains tax rate than the regular income tax rate.
The main advantage of 83(b) Election is that it allows you to calculate your income tax at the initial lower value if you expect the value of your stock to increase significantly in the future. This avoids a large future tax burden; the amount of income tax Vesting pays at termination is higher because it is tied to the future value.
In addition, if the value of the stock increases, the increase is considered a capital gain and is therefore taxed at a lower rate than the regular income tax rate at the time of sale.
On the other hand, there are several disadvantages to 83(b) Election. First, if the value of the stock does not rise as expected, or conversely, if it falls, the initial tax paid may be wasted. However, it should be unlikely that you would join a startup companstartupting the price to fall.
In addition, to make an 83(b) Election, you must file the appropriate paperwork with the Internal Revenue Service (IRS) within 30 days of acquiring the stock, and you lose your right to make the election if you miss this deadline.
When selecting an 83(b) Election, it is important to first carefully estimate the future value of the stock. If there is a possibility that the value could fluctuate significantly in a short period of time, the risks of the selection should be well understood.
Also, remember to submit the required documentation within 30 days of the acquisition, as there are strict deadlines for the election process.
In order to elect an 83(b) Election, you must first provide written notice to the IRS. This notice should include information such as the date the shares were acquired, the fair market value of the shares, and the name and address of the acquirer.
The notice must be filed within 30 days of the acquisition of the stock and a copy must also be attached to the employer and income tax returns.