Sand Hill’s Chief Investment Officer, Brenda Vingiello, CFA, returned to CNBC’s Halftime Report on August 28, 2019 to discuss interest rates and the current stateread 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.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.