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Section 83(b) Election

Section 83(b) Election

A letter and election form notifying the IRS of an equity holder’s election to be taxed on equity at the time the equity is granted by a company rather than when the equity vests. An equity holder may elect to pay tax on the value of the equity when granted because its value is lower than it is upon vesting. A Section 83(b) election also starts the equity holder’s capital gains holding period.

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A Section 83(b) election is a formal filing made by an equity holder with the IRS electing to be taxed on property received in connection with the performance of services even though the taxpayer may not get to keep or may have to forfeit that property. The Section 83(b) filing informs the IRS to tax an equity holder’s equity when it is granted, rather than when the equity vests. Section 83(b) elections are only used for equity that is subject to vesting. A Section 83(b) election has to be filed with the IRS within 30 days of grant of the property, and a copy has to be filed with the tax return of the person making the election. A copy also must be provided to the company. The Section 83(b) election document contains a description of the property that is subject to the Section 83(b) election, the date the property is transferred, the nature of the restriction(s) to which the property is subject, and the fair market value of the property.