You work for a proteomics start-up and receive a grant of 100,000 restricted shares with a value of $0.10 per share, for a total grant date value of $10,000. For simplicity, we’ll say all 100,000 shares vest in two years.

The start-up is wildly successful, IPOs, and two years later the stock is worth $20 per share. At that time, your 100,000 shares vest with a total value of $2M. For even more simplicity, we’ll assume you sell all 100,000 shares when they vest.

Without an 83(b) election, you’ll report the value of the 100,000 shares on the day they vest ($2M) as compensation income. In other words, the $2M is taxed at ordinary rates. At a combined Federal & California rate of ~50%, that’s a tax bill of ~$1M.

If you filed an 83(b) election within 30 days of receiving the grant, however, you’d pay tax on the $2M gain at more favorable long-term capital gain rates. At a combined Federal & CA gain rate of ~35%, that’s a tax bill of ~$750K, for a savings of ~$250K.

Caveat: When you file the election, the grant date value ($10,000 in this case) is taxed as compensation income. This means you’ll pay ~$5K in ordinary income tax at the time of the grant.

Quick summary:

Total tax paid without 83(b) = $1M

Total tax paid with 83(b) = $755K

What if the company isn’t successful and the shares are worthless in two years? That’s the bummer. You’d have paid $5K in tax on stock that’s now worth $0, so carefully weigh the trade-offs.

When might an 83(b) election make the most sense? That’s somewhat straightforward. When the upfront tax hit is relatively small and the prospects for growth very high.

Fortunately, far less complex than the proteome.

If you found this helpful, let us know. Cheers!

Disclaimer: For information purposes only and should not be interpreted as legal, tax or financial advice. Always consult your CPA/tax advisor/attorney (or reach out to us;) to discuss your specific situation. Past performance is no guarantee of future results.