83(b) Election

What it means

Usually, you pay taxes on stock only after it is fully yours, a process called vesting. An 83(b) election allows you to tell the IRS you want to pay your taxes on that stock today, right when you first get it.

By paying the tax now, you lock in the current value. If the stock grows in value later, you won't owe extra tax on that growth until you decide to sell the shares. This helps you avoid paying higher tax rates later.

A simple example

Imagine Sarah buys 1,000 shares of her company stock for $1 per share. She pays $1,000 total. The current market value is also $1 per share. If she files an 83(b) election, she owes $0 in taxes because the price she paid equals the market value. A year later, the stock is worth $10 per share. Because she filed the election, she doesn't owe any more tax on that growth until she sells the stock, and she will pay a lower tax rate on the profit.

Why it matters to you

• It can lower the amount of tax you pay on future profits if your company stock price goes up.
• It changes how your profit is taxed, often letting you pay lower capital gains tax rates instead of higher income tax rates.
• You must act quickly; you have exactly 30 days after getting the shares to file this form, and there are no extensions.

Common mistakes to avoid

• Missing the strict 30-day deadline, which means you cannot use this tax choice at all.
• Thinking this applies to Restricted Stock Units (RSUs), which are a different type of reward that does not qualify for this election.
• Forgetting to send the form to the IRS, as simply telling your company is not enough.

Words used on this page

• Vesting: The process where you earn the full right to keep your company stock over time.
• Capital Gains Tax: A lower tax rate you pay on the profit when you sell an asset for more than you bought it for.
• Restricted Stock Unit (RSU): A promise from your company to give you shares or cash once you meet certain work goals.
• Fair Market Value: The price a willing buyer would pay for your stock today.
• 83(b) Election: A formal letter sent to the IRS that chooses to pay taxes on stock on the day you receive it.