If part of your employee or contractor comp package are stock options, this one's for you....

I'm getting questions from a few of you lately about these work .  I think time for a quick tune up on this.

83b elections are a lot simpler than you think.  It goes like this:

If you're paid stock that's subject to restrictions on your ability to freely sell (think vesting period),  then the stock is taxable income to you at the time the restrictions are gone and you can freely sell.  But consider this:  what if the value of the shares today ( at the time you're given the shares) is only a penny, but in a year or two, when the restrictions are gone, the value of the shares has risen to $10/share.  (perhaps a new investor round has happened, raising the value of the company),  You're taxed at $10/share as ordinary income.  And the tax can run as high as 50%.

Instead, to help save on taxes, IRS Section 83b allows you to make a bet.  The bet is that the shares will ultimately be worth something, and you're willing to pay something today (pre-vesting).  

83b says that instead of waiting to report and pay tax on the value of the shares at the time the restrictions lift, you can instead be taxed at the time the shares are paid to you (with the restrictions).  Meaning that in this example, you're only taxed on a penny/share and any subsequent appreciation is taxed at lower capital gains rates.

This play obviously makes most sense when the value of the shares is very low and you have the cash to pay any (nominal ) tax due.

To make the election, there's a short form you fill out and mail to irs within 30 days of receiving the stock.

Hope this helps.  If you have questions, please let me know.