83(b) Election: How it can cost you or save you big money.
There are “a few” opportunities in the tax code to save money on taxes. One of them known to people in tech, energy, and finance -the people who commonly get stock options or restricted stock as part of their compensation package. It’s called the 83(b) election.
What is it and how does it work?
The 83(b) election allows someone to be taxed on the value when granted instead of at vesting. This can be a big benefit as it allows you to get taxed when the stock price is lower than it might be at vesting. Imagine being an Nvidia employee and filing the 83(b) election in 2021 and getting taxed when Nvidia shares are somewhere in the $114.05/share range. If you were granted ISOs or restricted shares for 1,000 shares over four years, then add $13,080 to your income when calculating your tax bill. Assuming you do what you need to do to vest, by staying four years, here is what your outcome looks like.
As of this writing, the stock price for Nvidia is $183.10. Not including reinvested dividends this solves for a current value of $183,100 while you were taxed on $13,080 of value. Let’s say you’re in the 35% bracket, you would have paid the IRS $4,578. Now, if you satisfy the holding period for long term capital gains, you will be taxed at a maximum of 20%.
You might think to yourself, “well, maybe I should have waited and been taxed at vesting, the stock price could have easily gone down”. But that’s not an option because the 83(b) election has to be filed “no later than 30 days after the date the property was transferred”. In this case, the property is the grant.
So what happens when the stock declines or you leave the company?
Short answer: Your screwed. You are not getting back any taxes you’ve already paid.
Longer answer and example: In our example above, if you would have made the 83(b) election and then left the company after a year, you would not be getting your $4,578 back. I did this example on 1,000 shares, so the numbers aren’t that bad, but if you were a C-suite executive or director who was granted 12,000 shares, the numbers can get big quickly. Had you been working at Shutterstock (SSTK), this would look downright tragic. I was going to use Peloton Interactive (PTON) but they don’t issue ISOs or restricted shares.
Can people with Restricted Stock Units (RSUs) use the 83(b) election?
No, but they can use the 83(i) election. Which is not exactly like the 83(b), but I’ll cover that in another post.
Author: William Nunn, CFP® Financial Planner, Founder of Horizon Financial Planning LLC