“83(b) Election” is a tax election that a holder of Restricted Stock subject to Vesting can use to receive special tax treatment from the IRS. By making an 83(b) Election, the Stockholder elects to be taxed immediately on the current value of the Restricted Stock, rather than waiting to pay taxes when the Restricted Stock vests over time. The benefit of making the 83(b) Election is that, for most Early-Stage Companies, the current value of the Restricted Stock is very low compared to its potential value in the future.
Important Note: The IRS requires that the Stockholder file the 83(b) Election within 30 days of its receipt of the Restricted Stock, with no exceptions. There is no cure for a failure to file the 83(b) Election before this 30-day deadline.
As a simple example to illustrate the potential tax consequences relating to the 83(b) Election, if you (a) are granted 10,000 shares of Restricted Stock subject to Vesting, which initially are valued at $0.001 per share, and (b) timely file an 83(b) Election with the IRS (i.e., before the 30-day deadline), then your taxable income will be $0.00 if you initially pay $10.00 to the company as the full value for the shares of Restricted Stock received.
However, if (x) you do not file an 83(b) Election before the 30-day deadline and (y) the shares of Restricted Stock are valued at $1.00 per share when they vest fully on a future date, then you will need to recognize ordinary taxable income equal to $9,990.00 (i.e., $10,000.00 less the $10.00 paid upon the initial issuance of the shares of Restricted Stock). Please note also that, if the shares of Restricted Stock vest incrementally over time (e.g., with Standard-Cliff Vesting), then you will need to recognize ordinary taxable income at each Vesting point for the corresponding shares of Restricted Stock that have vested.
As with all tax matters, it is critical that you consult with knowledgeable and experienced tax advisors when reviewing, analyzing and filing an 83(b) Election.