Smarter way to handle stock option taxes
What is an 83(b) election?
- In general, stock options are taxed at the time of exercise.
- Code 83(b) allows you to choose to pay taxes on stock options at the time of grant.
Why is 83(b) important?
- Employees can pay income tax on stock options based on the grant date's fair market value (FMV) instead of exercise date.
- Benefit: Pay taxes early (at the grant date) to avoid higher taxes due to increased FMV after 2–3 years of vesting.
How does 83(b) work?
- Who can use it: Employees receiving U.S. stock plans like Restricted Stock Awards & Non-qualified Stock Options.
- When to elect: At the time of stock grant.
- How it works:
- Upon election, pay exercise price and taxes upfront.
- Taxes are calculated based on FMV on the grant date.
Tax implications: With vs. Without 83(b)
| Tax Event | Without 83(b) | With 83(b) |
|---|---|---|
| Grant Date | No tax | Tax on (FMV - Exercise Price) |
| Exercise Date | Tax on (FMV - Exercise Price) | No tax |
| Sale Date | Capital gain tax on (Sale Price - Exercise FMV) | Capital gain tax on (Sale Price - Grant FMV) |
Before electing 83(b)
- Review your stock plan agreement with the company.
- Understand your long-term career and stock strategy.
- Evaluate the company’s growth prospects.