When is an 83(b) election appropriate to make and what are some of the benefits from it? Section 83 applies to employees who receive stock that is subject to vesting. It is an election that would allow the taxpayer to be taxed at the time of the receipt of the property. There are various examples of where this would apply, including where the founder and employee agree to a stock option plan that allows them to exercise their options prior to vesting but subject to a restrictive stock agreement. The taxpayer can benefit from a substantial decrease in tax liability if an 83(b) election is timely made.
When the 83(b) election is made, the income is recognized at the time when the stock is purchased rather than when the stock vests and this also triggers the holding period of the stock. Often, the stock purchase price and fair market value on the purchase date are the same and, therefore, shouldn’t have any income to recognize from the stock purchase. If the 83(b) election isn’t made, then the income that will be recognized is the difference between the purchase price of the stock and the fair market value when it vests, even if the stock isn’t sold.
The most optimal scenario to make this election is when the stock price is likely to increase in value after purchase of the stock. The 83(b) election must be filed with the IRS no later than 30 days after the stock has been purchased.