Blog Article

83(b) election in action

Stock Market Analysis Abstract

By Merriman Wealth Management, Wealth Advisor
Published On 02/24/2015

Every time I meet with a tech executive or founder holding restricted stock, I ask them if they made their 83(b) election. By this point, many have heard the phrase but few can point to an example that is easy to follow. There are both potential risks and rewards in making this choice.

Example of 83(b) Election in an Optimal Situation

You receive a grant of 90,000 restricted shares vesting over three years. The price per share at grant is $0.01. Assume you hold the vested stock and sell at the beginning of Year 5, your marginal income tax rate is 39.6%, your long-term capital gains tax rate is 20%, and net investment income tax rate is 3.8%.

  • End of Year 1, the company received angel investment and the value per share is $1.
  • End of Year 2, the company picks up steam and the value per share raises to $5.
  • End of Year 3, the value per share is $10 and the company prepares to go the venture capital route.
  • Beginning of Year 5, the price per share jumps to $20 due to funding valuation.

Without an 83(b) election, you will recognize taxable income each year on the vested portion. The taxable income will be equal to the fair market value less the grant price. Over time, if the value of the stock increases, you will pay more tax at each vesting event.

If you make an 83(b) election, you will accelerate your vesting for tax purposes to the current year and realize income on the current value now.

This example displays the benefits in an optimal situation. It assumes one income tax rate across multiple years with the sale of stock occurs more than one year after full vesting. Depending on your particular situation, the impact of an 83(b) election may change substantially. Discuss the implications with your tax accountant and/or financial advisor to find out if this option is right for you.

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By Merriman Wealth Management, Wealth Advisor

At Merriman, we manage your wealth so you can lead your best life. We take care of the financial planning and investment management, so you can deal in more possibilities and have the space you need to dream big.

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