If an employee receives stock as part of their compensation, but the stock will not vest for several years, the employee can make a section 83(b) election to include the current value of the stock in their gross income. The section 83(b) election must be made within 30 days or is invalid. If the employee does not make a section 83(b) election, the stock would be includible in the employee’s gross income at the price and in the year the stock vests.
Employees should consider whether they are confident the stock will increase in value before making a section 83(b) election. Further, the employee must consider whether their tax rate will be higher in the year of receipt or when the stock vests.
While section 83(b) elections can result in significant tax savings if the value of the stock appreciates, it can have negative implications if the stock reduces in value – or does not vest.
If the stock reduced in value at the time it vests and the employee made a section 83(b) election, the employee would have paid more taxes than necessary. The employee would not receive a loss deduction. Worse of all, if the employee leaves the company before the stock vests, the employee would have paid taxes on a stock they did not receive without a deduction to offset.
