But the difference between the tax rates for ordinary compensation income (37% max.) and long-term capital gains (20% max.) may change your calculus. Q: Why would I want to file an 83(b) election if doing so will accelerate my income?Ī: Fair point normally you want to defer rather than accelerate taxable income. Any further appreciation or depreciation of the stock is capital gain or loss. In either scenario, upon the “compensation event” (i.e., the vesting date or grant date, depending on whether the 83(b) election is made), the income is taxable at ordinary rates and your holding period in the property begins. That is, you have taxable income as of the grant date, based on the fair market value of the property on that date. The function of an 83(b) election is to make the grant date the relevant date, rather than the vesting date. That is, you recognize taxable income in the year in which the stock is substantially vested, in the amount of the difference between the stock’s fair market value on the vesting date and any amount you paid for the property. The general rule is that the vesting date governs both the timing and amount of taxable income. Below are some answers to the most commonly asked 83(b) questions.Īlthough the rules are written more generally to apply both to employees and independent contractors, to any kind of restricted property, and whether the property is transferred to the service provider or a third party, let’s focus on the typical situation where you are an employee of a corporation and you receive unvested stock of your employer as compensation for services.Ī: As background, when property is transferred in connection with the performance of services, Section 83 governs the timing and amount of compensation income taxable to the service provider. This is a revised and updated version of a post that originally appeared on September 13, 2016.īOSTON - Here at BHTP, no executive compensation question from clients or co-counsel is more common than those concerning Section 83(b) elections.
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