The Potential Tax Benefits (or Drawbacks) of Form 83(b)

Form 83(b) is an optional form filed with the IRS that allows you to claim the taxable income of restricted stock on the grant date, rather than the vesting date. In some circumstances, this can be a significant tax savings, allowing you to achieve capital gains tax rates on all the appreciation, instead of only the appreciation amount after the vesting schedule requirement has been met.

However, the election is not without risk. When you elect to pay ordinary income taxes on the grant amount of stock, not only do you have the risk of holding an equity position that could lose value, but you also have the risk of paying income taxes on income you may never actually receive.

Potential Benefits of Form 83(b) Election

You start the 1 year clock to satisfy long term capital gains holding period requirement at the grant date instead of the vesting date.

If elected before the sunset of the Tax Cuts and Jobs Act in 2026, you could potentially pay a lower marginal income tax rate now, versus what marginal income tax rates revert to. Example: the current highest federal marginal tax rate for individuals is 37% but will revert to 39.6% for the 2026 tax year.

Potential Drawbacks of Form 83(b) Election

You do not have long to make this decision; the form must be filed within 30 days of receiving the grant.

You now must pay the ordinary income tax liability but have no shares that have vested you can liquidate to cover the cost.

If the stock becomes worthless after the grant date and before your vesting date, you could end up paying ordinary income taxes on the grant amount, although you received no economic benefit.

?

Whether or not to file form 83(b) depends on a myriad of factors. If you are in a situation where this is an option for you, it is best to consult with a qualified professional. You should also consider what role the restricted stock plays in your overall financial circumstances and objectives. Consultation with a qualified Financial Planner can help you make the determination if the election is the right course for you.

About the Author:

Reagan A. Hamilton, ChFC? is a Financial Consultant with Michigan Financial Companies who helps his clients to simplify their finances through dynamic financial planning that addresses their entire financial picture. With a deep knowledge of professionals with equity-compensation and corporate stock benefits, he advises clients on retirement, estate planning, investments, and risk management. Reagan is currently accepting new clients and can be reached at 248-663-4772 or [email protected].

Securities and investment advisory services offered through Osaic Wealth, Inc., member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.