A Guide to Form 83(b) Filing

Form 83(b) filing is an important process for anyone who receives stock options or restricted stock units (RSUs) from their employer.

This form allows employees to elect to be taxed on the value of the stock at the time of grant rather than when it vests, which can result in significant tax savings for employees.

So, if you are new to Form 83(b) filing and feeling overwhelmed by the process, we’ve got you covered! In this beginner’s guide, we’ll break down everything you need to know about Form 83(b) filing so you can confidently navigate it.

Get ready to demystify the process and take your US tax filings to the next level!

What is Form 83(b)?

What is Form 83(b)

Form 83(b) is an election form for reporting stock options or restricted stock issuance to employees, consultants, and other service providers.

Stock options are financial instruments that give individuals the right to purchase company stocks at a specified price within a certain period of time.

On the other hand, restricted stocks are limited in their ability to be sold or transferred, usually due to vesting requirements.

Form 83(b) is specifically used for reporting the transfer of ownership from an employer or company to an individual. It must be filed with the Internal Revenue Service (IRS) within 30 days of the date the stock option or restricted stock was granted.

It allows you to report any unvested stock or RSUs as income at its current fair market value.

In simple terms, Form 83(b) filing lets you pay taxes on your stock options or RSUs upfront rather than waiting until they are vested and potentially paying higher taxes. So, you are betting that the value of the stock will increase over time.

By paying taxes on the initial value of your equity compensation, you may avoid paying higher taxes once it vests and potentially increases in value.

For Instance, assume you receive 100,000 shares subject to vesting. The shares are worth $0.01 each at the time of grant, $1.00 each at the time of vesting, and $5.00 each when sold more than one year later.

Assume the ordinary income tax rate is 37% and the long-term capital gains tax rate is 20%.

In the scenario where 83(b) election is filed, the calculation will be:

  • At Grant: Par value is $0.01
  • Shares worth: $1,000 (100,000 shares x $0.01 per share)
  • Ordinary income tax: $370 ($1,000 x 37%)
  • At Sale: Par value is $5
  • Taxable gain per share: $4.99 ($5.00 – $0.01). $0.01 is reduced as tax is already paid when the par value of the share was $0.01 per share at grant.
  • Total taxable gain: $499,000 ($4.99 x 100,000 shares)
  • Capital gains tax: $99,800 ($499,000 x 20%)
  • Gain After Tax:$399,830 ($500,000 – $370 – $99,800)

In the scenario where 83(b) election is not filed, the calculation will be:

  • At Vesting: Par value is $1
  • Shares worth: $100,000 (100,000 shares x $1.00 per share)
  • Ordinary income tax: $37,000 ($100,000 x 37%)
  • At Sale: Taxable gain per share: $4.00 ($5.00 – $1.00)
  • Total taxable gain: $400,000 ($4.00 x 100,000 shares)
  • Capital gains tax: $80,000 ($400,000 x 20%)
  • Gain After Tax:$383,000 ($500,000 – $37,000 – $80,000)

So, you save $16,830 ($399,830 – $383,000) in taxes as share prices increase. Also, suppose you sell your stocks after holding them for over a year. In that case, you may qualify for a long-term capital gains tax rate, further reducing your overall tax liability.

Who Needs to File Form 83(b)?

Who Needs to File Form 83(b)

Form 83(b) is a crucial tax form that must be filed by certain individuals who receive stock options or restricted stock units (RSUs) as part of their compensation.

These individuals must file Form 83(b) within 30 days of receiving the stock or RSUs, and failure to do so can result in strict penalties.

1. Employees Receiving Stock Options

If you are an employee receiving stock options from your employer, you must file Form 83(b).

This applies whether your company is publicly traded or privately held. Stock options give employees the right to purchase company stock at a predetermined price, usually lower than the market price.

When you exercise these stock options, there is typically a difference between the exercise price and the stock’s fair market value on the exercise date. This difference is known as “spread” and is subject to taxation.

By filing Form 83(b), you can pay taxes on this spread upfront rather than when you sell the stock in the future.

2. Employees Receiving Restricted Stock Units

Similarly, if you receive restricted stock units as part of your compensation, you must also file Form 83(b). Like stock options, RSUs have a fair market value when they vest and become unrestricted.

By filing Form 83(b), employees can report this amount as ordinary income and save money on taxes in the long run.

3. Founders or Early Investors in Private Companies

Founders or early investors in private companies may also need to file Form 83(b) if they receive equity in the form of stock or RSUs. Like employees, these individuals must file this form within 30 days of receiving the equity.

4. Non-Employees Receiving Equity as Compensation

If you are not an employee but receive equity as compensation for services rendered, you must also file Form 83(b). This can include consultants, contractors, or board members who receive stock options or RSUs from a company.

Benefits of Filing Form 83(b)

Benefits of Filing Form 83(b)

Filing Form 83(b) benefits employers and employees alike. For employers, it helps them stay compliant with tax laws and regulations while allowing them to offer equity-based compensation to their team.

Employees can reduce taxes by reporting the stock’s fair market value at the time of grant rather than when it vests or is exercised.

1. Avoiding Tax Consequences

By filing Form 83(b), you elect to pay taxes on the fair market value of your stock options when they were granted rather than when they vest. This means that if your company’s stock price increases after you have exercised your options, you will not be subject to additional taxes.

2. Lock-in Lower Tax Rates

Another advantage of filing Form 83(b) is that it allows you to lock in lower tax rates for long-term capital gains.

When you sell your stock options after holding them for more than a year from the exercise date, any profit made is considered a long-term capital gain and taxed at a lower rate than short-term gains.

3. Preserve Potential Losses

Filing Form 83(b) also allows you to preserve potential losses if your company’s stock price decreases. If you do not file this form and wait until your stocks vest before exercising them, any loss incurred will only be deductible against future gains from selling those stocks.

4. Increase Return on Investment

If the company’s stock price significantly grows between these dates, you can increase your return on investment by paying taxes on the fair market value at the grant date instead of the vesting date.

5. Simplify Tax Reporting

Filing Form 83(b) also simplifies tax reporting, reducing the number of transactions reported on your tax return. Instead of reporting every time an option vests or is exercised, only the initial grant date needs to be reported with this form.

How to Properly File Form 83(b)

How to Properly File Form 83(b)

Filing Form 83(b) may initially seem complex, but it’s a relatively straightforward process. The first step is to obtain the necessary form from your employer and fill it out with accurate information. You must mail the completed form to the IRS within 30 days of receiving your equity compensation.

The form requires detailed information, such as the issuer’s and recipient’s names, addresses, and relevant tax identification numbers (SSN or ITIN).

It also requires a stock purchase agreement (SPA) or employment agreement (wherever the share information can be found) because that will include the type of shares, FMV, amount of shares, purchase price, etc.

One crucial aspect of Form 83(b) filing is determining whether you need to file it. This will mainly be for C-corps, as LLCs don’t have shares or units.

Even if they do, an 83(b) might not even be beneficial as the value of the shares in an LLC doesn’t increase or decrease, and investors typically only invest in DE C-corps.

It may also depend on whether you are receiving non-qualified or incentive stock options, whether there are any restrictions on your equity grants, and whether you meet certain criteria set by the IRS.

Therefore, it’s always best to consult a tax professional or CPA to ensure compliance and maximize tax benefits before filing this form.

Steps to File Form 83(b)

Steps to File Form 83 (b)

Filing Form 83(b) can result in significant tax savings for employees and early-stage company founders only if used strategically and correctly.

Therefore, we will guide you through the process, from understanding when it needs to be filed to completing the form correctly.

1. Determine If You Need to File Form 83(b)

83(b) is more beneficial if the amount of income reported at the grant is small, the potential for company growth is high, or the risk of stock forfeiture is very low.

However, you can avoid filing if the income reported on the grant is large, company growth is slow, and there’s a high chance of the company failing.

2. Understand What Information Is Needed

As mentioned earlier, you will need specific information such as your personal details, employer’s name and address, grant details, the number of shares granted and fair market value at the grant date, and any consideration paid for stock options or equity compensation.

Ensure you have all this information ready before starting the form-filing process.

3. Getting Started with Filling out Form 83(b)

Form 83(b) has two parts. Part I requires basic information about yourself and your employer. Part II contains important declarations that need to be signed by both you and your employer.

You can complete a paper or submit an electronic version using the IRS e-file system.

Whichever method you choose, make sure to follow the instructions carefully and double-check all the information before submitting.

4. Submitting Form 83(b)

Filing Form 83(b) is relatively simple and costs only $250 per person.

Still, it requires careful attention and timely submission. Before starting the form-filling process, ensure you understand your eligibility and have all the necessary information.

This will ensure that you can take advantage of potential tax savings and avoid penalties for late filing.

Tips for a Successful Form 83(b) Filing

Tips for a Successful Form 83(b) Filing

1. Know Your Deadline

Generally, this form must be filed within 30 days of your stock being transferred to you.

However, it is always best to double-check with your company’s human resources department or advisor for specific tax filing deadlines.

2. Gather All Necessary Information

To successfully file Form 83(b), you will need certain information, such as your personal details, employment details, and agreement about the transferred stock.

Make sure you have all this information readily available before starting the filing process.

3. Fill out the Form Accurately

Accuracy is key when filling out Form 83(b). Any mistakes or omissions can lead to penalties or processing delays.

Make sure to carefully review and double-check all information before submitting the form.

4. Include a Cover Letter

You may also need to submit a cover letter with two copies of your completed Form 83(b).

This letter should state that you have included all necessary documentation and briefly explain why you submit this form.

5. Keep Copies for Your Records

Once you have successfully filed Form 83(b), make sure to keep a copy for your records. The IRS will stamp and send the second copy to you so you can keep it on file in your records.

This will come in handy when filing your taxes or if any issues arise in the future.

6. Keep Track of Future Vesting Dates

If you receive additional stock grants or options, make sure to keep track of their vesting dates. You may need to file Form 83(b) again for these transfers, so staying organized is crucial for a successful filing process.

7. Filing as a Non-us-Resident

Non-residents are advised to be in the US within the next couple of years or by the time a big liquidity event happens, and they will be paying taxes anyway.

If you are a non-resident and your company sells shares in your company, you will need to file a 1040-NR for the income from the sale. 

So, if the founders’ goal is to sell anyway, there really isn’t a downside to doing this because you’ll end up paying US tax on that sale anyway.

So, when filing, you need to put “FOREIGNUS” or “NRA” under the SSN field, or if you have an ITIN, you can use that.

Save Yourself from the Hassle with doola

We know that was a lot, but you can find most of this information on the IRS website or online. However, filing these forms out alone can be confusing and even time-consuming. Don’t worry, we can help!

Get started with doola’s Total Compliance Package, which handles all the paperwork and tax filings with the IRS for you. You can also use our extensive bookkeeping solution to ensure every financial transaction is taken care of for seamless operations.

Right from business formation to running your business from any part of the world and taxation or compliance – doola is a partner that walks you through every step of the journey, ensuring you enjoy a stress-free business.

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When to Choose doola

Are ITIN or SSN the only two options for Form 83(b)? Can an EIN not work?

You can do it without an ITIN or SSN if you plan to have one when your shares are sold. You can’t do it with an EIN because this is a personal tax document.

Can non-US founders with an SSN valid for work only with DHS authorization file for Form 83(b)?

Yes, no problem. If they have an SSN, they can file!

When does the 30-day time limit begin? Are the shares granted after the resolution is passed, or is there a specific timeline or process for this?

The 30-day time frame begins the day the shares are granted to the individual. It includes weekends and other holidays, not just 30 business days.

I don’t have an ITIN, but I must file Form 83(b) because my 30-day timeline has started.

You can file the 83(b) without an ITIN by adding “NRA,” “Nonresident,” or “N/A” in the identification number field. If you have applied for the ITIN but haven’t received it yet, you can write “APPLIEDFOR.”

The 30-day deadline is strict, yet you can file without having that information. However, you should have it when you sell your shares.

What are the consequences of not making an 83(b) election?

If you do not make an 83(b) election, there can be significant tax implications. For those who receive restricted stock or property subject to vesting, you will be taxed on the value of the stock or property as ordinary income when it vests.

This will result in higher taxes. Additionally, any future increase in the property’s value will be subject to capital gains tax upon sale, which might not be as favorable in terms of tax treatment overall.

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