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Section 83(b) Election

Internal Revenue Code Section 83(b) provides for the taxpayer to elect to be taxed at the ordinary income tax rate upon receipt of an equity grant. This taxpayer election occurs as of the date of the equity grant, rather than the equity vesting date.

Why would a taxpayer make such an election to pay ordinary income tax on the stock value rather than capital gains? The reason is that the grant date value is significantly lower than the expected value at a later date. The taxpayer must file a tax return within 30 days of this 83(b) election. One key element to the supportable election is a thorough valuation of the shares.

The Mentor Group is often hired to value these shares in startup or early stage companies (often tech firms). Sometimes we have a very short fuse to complete the analysis, since the election has been made. Since the stock is usually restricted and issued when the firm has little or no revenue, the election often results in a de minimis value. If held more than one year after the 83(b) election, the value appreciation is taxed at capital gains rates.

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