When dealing with vesting or exercising equity shares, it’s important to understand how they are taxed. Owners or employee equity holders may be subject to taxes on their equity at the time it is vested or exercised. This is often a future date instead of the grant date. The tax liability will increase based on the companies value at that future time. This is not what many want. Is there a way around this? Yes.
An 83(b) election gives the equity owner the ability to pay taxes when granted equity based on the fair market value at that time. This can be beneficial if the company is going to increase in value because you only have to pay taxes on the current price. If one does not file an 83(b), they can find themselves paying more money each tax season after vesting events. Not all who apply for an 83(b) election will get approved. This is up to the IRS as they must inspect then approve or decline each 83(b) filed.
Filing for an 83(b) election can be quite an extensive process. Before you file make sure you are within the 30-day window from accepting a stock grant. If you are outside this window you will automatically not qualify so save your time and effort.
The first step is to gather all the necessary information about your equity shares. This includes how many, price, date of issuance, vesting and exercise information, etc. Next, draft a letter to the IRS. This letter should include all this information along with your income, full name, address, and social security number. You will need to send two copies of this letter to the IRS. Accompanying these letters should be a cover letter and a return addressed envelope.
Once you have sent this to the IRS, you should also send a copy of the letter to your employer and keep one for your records as well. If your application for an 83(b) is successful and the IRS approves it, they will send a stamped letter back in the addressed envelope you provided with your application.
For more information on owning equity or other topics, check out Equa's blog.