Section 83(b) of the Internal Revenue Code sets up a way for employees and founders to potentially lower their tax burden. To get this favorable tax treatment, you need to file an 83(b) election with the IRS. It’s a complicated, multi-step process—but we’re working to make that better.
In this article, we’ll cover:
- What is an 83(b) election?
- What are the benefits of filing an 83(b)?
- Tax implications of an 83 (b)
- How do you make an 83(b) election?
- How to e-file your 83(b) with Carta
Note: This information is a general overview of how the 83(b) election works. You should talk to a tax advisor before making decisions about whether to file.
The benefits of filing an 83(b)
The tax impact of exercising stock options can keep startup employees from unlocking the power of their equity. Not everyone has cash available to pay a hefty tax bill—and if you work for a private company, you may not be able to sell your shares for quite a while. A lower tax bill can make ownership possible for more employees.
Meanwhile, founding a company or joining at the very early stages involves taking a substantial risk. The possibility of a tax break can help motivate people to take that risk and build something new.
Tax implications of an 83(b) election
The tax implications of an 83(b) vary by the type of equity you hold.
ISOs and NSOs
With these two types of stock options, you’ll file an 83(b) election if you decide to exercise your options early, before they’re fully vested. When you do, you’re basically accelerating the spread between the strike price of your options and their fair market value (FMV)—so that you’re not paying taxes on any potential rise in that spread as your shares continue to vest over time. If you don’t file the election, though, it’s as if your early exercise never happened.
If you have incentive stock options (ISOs) when you file an 83(b) election, the spread between the FMV and your exercise price is included as income for the alternative minimum tax (AMT). Without an 83(b), you may have to pay AMT on the spread between the strike price and the fair market value (FMV) as you continue to vest—instead of the spread at early exercise. This could potentially trigger the AMT or lead to a higher AMT.
If you have non-qualified stock options (NSOs), that same spread is income for ordinary income tax. Failing to file 83(b) election will mean that you’ll be subject to a higher income tax rate if the FMV increases as your options vest.
With both types of options, if you hold your shares for a period of time before selling, you may be subject to lower tax rates when you sell. The earlier you exercise and hold your shares, the earlier those holding requirements kick in.
With RSAs
Founders and early-stage employees often receive restricted stock awards (RSAs). The value of these can vary based on the company’s FMV, but they’re typically issued at nominal value (like $0.001 or $0.0001 per share). This means that if you file an 83(b) election when they receive your RSAs, you’re likely to have very limited tax liability because you’re recognizing that spread (which is zero or very, very small) as ordinary income tax up front. When you eventually sell these shares, you’ll be subject to capital gains tax on the difference in FMV at the time of sale.
Without an 83(b) election, the spread between the FMV at vest less your purchase price would be subject to ordinary income tax.
83(b) election deadline
If you exercise early and don’t make an 83(b) election within 30 days, you won’t get the tax benefit. So if the company valuation has increased and you haven’t filed an 83(b), you’ll pay more in taxes when your shares vest or you sell them in the future (depending on grant type).
Beyond the liability for the employee or founder, this can also create tax issues for the issuing company.
How to file form 83(b)
To qualify for preferential tax treatment, your 83(b) form must be postmarked and mailed to the appropriate IRS office within 30 days of accepting your stock grant or the date of your early exercise.
The process for submitting this form has several steps, and can be burdensome. Here’s what the IRS requires:
- A signed, completed 83(b) election form
- A cover letter for the IRS
- Two copies of the form for the IRS with a stamped, self-addressed envelope
- A copy for the issuing company
When you fill out the form, you’ll need to provide the following information:
- Name
- Address
- Social security number
- Number of shares
- Type of shares
- Issuing company name
- Date granted or purchased
- FMV on the above date
- Amount paid for shares
- Your gross income
Until recently, you had to fill out the entire form and cover letter by hand, make the copies yourself, and mail them to the IRS and your company, keeping a copy for yourself. We noticed that the 83(b) election process was difficult for employees to manage, with many people unknowingly missing the deadline. So we set out to make it easier.
Sign and file your 83(b) electronically
The Carta policy team worked with a broad coalition of accelerators, law firms, and investors to get the IRS to temporarily allow an electronic signature for 83(b) filings. Currently, once the form is signed electronically, you still need to mail it to the IRS. We’re working with our coalition partners to expand this to full electronic filing of 83(b) elections, and to make the modernized process permanent.
How to file your 83(b) for early exercise with Carta
If you’re an eligible employee and your company manages its equity through Carta, you can now electronically file an 83(b) with Carta. We’ll send the IRS copies along with the cover letter so you don’t have to. The copy for the issuing company and for your records are automatically on Carta.
1. Choose shares that are eligible for early exercise in Carta.
If your company allows early exercise, you will be able to choose those shares within your Carta account.
2. Access the digital 83(b) form.
Once you have early exercised an option grant, find the 83(b) tax form in the 83(b) elections tab of each exercised grant.
At this point, you can choose to print out a form, fill it out and sign it, and send it yourself. Or you can have Carta to do it for you electronically. If so, you’ll keep going:
3. Fill out the form and provide an e-signature.
If you want Carta to submit your form, you’ll need to make that selection no more than 25 days after you exercise your option or are issued your RSA. (That way, you’ll make sure your documents have enough time to get sent to the IRS through the mail in the required timeframe.)
The electronic form saves you several steps. We pre-populate most of the information, so you can verify that it’s correct and provide your e-signature. We’ll also auto-generate a cover letter based on the information you’ve confirmed.
4. Submit your form for Carta to mail on your behalf.
Once you’ve confirmed, complete the 83(b) workflow by clicking the “Save this 83(b) election” button at the bottom of the screen to provide a copy of the tax form to your company and let Carta know you’re ready for us to mail it to the IRS.
5. Track the form.
From the 83(b) elections tab on the option grant modal, you can view the USPS tracking number and the submitted 83(b) form. We recommend keeping the USPS confirmation number for your records.
Help your employees make timely 83(b) elections with Carta
Carta Tax Advisory helps employees make informed decisions about their equity and taxes—powered by Carta’s cap table platform. Learn how you can help educate your team about 83(b) elections and other tax questions about their equity. Get a demo now.
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