For startups and other companies issuing equity subject to vesting restrictions, familiarity with the 83b election is essential. Individuals receiving equity subject to vesting or certain other restrictions may want to file an 83b election in order to pay taxes on such equity at time of grant, when its value is likely to be relatively low, or lower than it may be in the future.
Codified under 26 U.S. Code § 83, the “election to include in gross income in year of transfer” is a provision of the US Internal Revenue Code which allows the grantee of equity subject to vesting or similar conditions the ability to pay taxes on the total fair market value of such equity at the time of grant, rather than upon vesting, because the holder of such equity has a “substantial risk of forfeiture” of the same. A startup attorney will be able to advise on matters of vesting of grants and what may constitute a “substantial risk of forfeiture.”
The key thing to note here, however, is that 83b elections must be filed with the IRS within 30 days of the issuance of the underlying equity, regardless of when it vests.
It’s also crucial to note that 83b elections apply only when there’s a substantial risk of forfeiture of the equity, e.g. vesting, repurchase restriction, etc. Furthermore, it’s important to note that an 83b election is not necessary for grants of options, though it may become relevant at time of exercise should the underlying equity still be subject to the aforementioned “substantial risk of forfeiture.”
Though a startup attorney can be a great resource, when considering issues related to the US Internal Revenue Code, the 83b election, or tax matters generally, it is generally advisable to also consult with a Certified Public Accountant (CPA) or other tax professional.
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