In the above video from CNBC’s Halftime Report, Sand Hill Chief Investment Officer, Brenda Vingiello, CFA discusses how to approach the market volatility. You areread more
Section 83(b): A Tax Code Small in Stature but Big on Impact
There are few opportunities that allow you to pay a tax bill now to avoid an even larger tax bill later. Tax Code Section 83(b) does just that. Put simply, Section 83(b) allows taxpayers to be taxed on equity grants, such as vesting stock awards, at the date the grant was made rather than at the date the equity tranches vest.
Today’s tax code allows you to file an 83(b) election, under which you are taxed at ordinary income tax rates at the current value of the grant. So, you are taxed upfront on the value of your full grant (the number of shares granted times their price at grant). Theoretically, you would be paying less in taxes assuming the value of the stock is higher at the later date of vesting. Assuming you hold the shares for more than one year from the grant date, the appreciation above the grant price is taxed at long term capital gains tax rates. It’s important to know that this election is only applicable for plans that are subject to vesting, since grants of fully vested stock are subject to taxation at the time of the grant and not available for RSUs.
By contrast, if no 83(b) was filed the full value of the stock at vesting is taxed as income. If you decide to continue holding vested shares, you must hold for an additional year following vesting before you would qualify for long term capital gains treatment on any further appreciation. Because long term capital gains tax rates are lower than ordinary income tax rates, you may benefit from your gain being taxed at the more favorable rate.
By filing an 83(b) election, your clock starts running for long term capital gains treatment earlier than if you allow your stock to vest following your company’s established vesting schedule. If, after filing an 83(b) election, you sell your stock prior to the one year anniversary of the grant date, you will not achieve long term capital gains treatment on the appreciation and the filing would not have been worthwhile. Short term capital gains tax would apply in this case, which today is the same as the ordinary tax rate.
Filing an 83(b) election is not without risk. If you receive a grant of 100,000 shares of stock at a valuation of $1.00 per share, you would owe a tax of potentially tens of thousands of dollars. If the shares fall in value before they vest, you would have been better off by not filing 83(b). This is a decision that should not be taken likely. If you receive company stock worth a nominal amount at grant, it virtually always makes sense to file.
Though 83(b) elections can apply to certain types of stock options, the IRS requirements differ from what is discussed here. Getting specific advice from your CPA and investment advisors is necessary and your tax advisor will guide you on the specific 83(b) election requirements. Planning and coordination with these advisors is key when considering an 83(b) filing. The filing must occur within 30 days of the grant date. It’s critical that you be very diligent about examining the terms of your grant(s). The time is precious in the tight window of opportunity.
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