83(b) Election Pros and Cons

The 83(b) election offers tax advantages for those receiving restricted stock or early-exercised stock options, but it’s not without its risks. Here’s a breakdown of the key pros and cons of making the election, so you can decide if it’s right for your financial situation.

 

Pros of the 83(b) Election

1. Early Tax Payment at a Low Valuation: One of the biggest advantages of the 83(b) election is the ability to pay taxes on the stock when it’s valued low, rather than when it vests and is likely worth more. This could save you a substantial amount in taxes, especially if the value of your stock increases significantly over time.
2. Capital Gains Treatment: Any appreciation in the value of the stock after the 83(b) election is subject to capital gains tax rather than ordinary income tax. This typically results in a lower tax rate, which could mean significant tax savings if the stock grows in value.
3. Locking in Your Tax Rate: By electing 83(b), you lock in your tax obligation at the stock’s current valuation. This means you don’t need to worry about potential future increases in your income tax rate or changes in tax laws that could affect you later.

 

 

Cons of the 83(b) Election

1. Upfront Tax Liability: The main downside of the 83(b) election is the upfront tax payment. Even though your stock is restricted and might not have a lot of value right now, you’ll still need to pay tax on it. This can create a cash flow problem if you’re not prepared for the immediate tax bill.
2. Risk of Stock Losing Value: If your company’s stock loses value or becomes worthless before the vesting period, you’ve already paid taxes on it and can’t get that money back. The 83(b) election is irreversible, meaning that if the stock doesn’t pan out, you’re still stuck with the taxes you paid upfront.
3. Potential Complexity: Filing the 83(b) election can be a bit more complicated than other tax forms, as it requires you to submit it within 30 days of receiving the restricted stock or options. The timing and paperwork can add to the complexity, especially for first-time filers.

 

Final Thoughts

The 83(b) election can be a powerful tool for tax planning, especially if you believe your stock will appreciate significantly. However, it comes with upfront tax costs and risks—so it’s not the right choice for everyone. Before making the election, it’s essential to consider your financial situation, the potential for stock growth, and consult with a tax professional to understand the long-term implications.