Linda Wang is Founder of Cambrian Law Group (cambrianlaw.com). In this video she talks about using 83(b) election to avoid excessive tax on restricted stock.
- Restricted stock: subject to a vesting schedule
- Steep taxation can be incurred as the stock vests
- File 83(b) within 30 days of initial grant to avoid paying higher tax
- Does not apply to options
- Capital gain must still be reported after sale
So one of the best kept secrets in start up law is the 83B election. When you have a start up that's just starting out, you don't have that much cash so you usually compensate your founders or early employees with restricted stocks.
What that means is that your stocks are subject to vesting according to, you know, a pre-agreed on upon vesting schedule. As your stocks are vesting, you are supposed to be paying taxes on ... you are supposed to be paying the income taxes on the increase of the valuation of your stock. So as your company grows and as your stocks are vesting, your stocks even though you don't want to sell it are actually accruing tax liability.
If you file an 83B at the time of your stock grant, at the time of your restricted stock grants and actually you have to file it either before your stock grant or within 30 days of the stock grant then you actually pay your income tax on the stocks at the value it was at the time of the grant instead of paying the value of your stocks as it vests. So in that way, you can actually save, potentially save lots of money on taxes.
One thing to keep in mind is that this 83B Election does not apply to options. Also after you sell your stock, even after you have filed your 83B Election, Capitals Gains taxes still apply. It's really important for every start up founder who is getting restricted stock grants to consider filing an 83B election and contact your attorney to see how you can do that.