I Got 99 Problems but an 83(b) Ain’t One
By default, the IRS taxes the difference between the purchase price of a founder’s stock holdings and the current market value of those holdings at each step within a vesting schedule as a taxable event. This is burdensome in terms of time and resources, as the full market value of the shares held then needs to be evaluated 48 times over the course of a standard 4 year vesting schedule. It can also become a major tax burden, as the difference between the current value and the purchase price is considered taxable income at each step — even though the income is tied up in stock that cannot be sold freely.
Thankfully, the IRS allows founders to choose an alternative tax structure through an 83(b) election. In this case, there is only one taxable event — the initial purchase of the stock. Because founders generally pay full market value for their shares, and they are taxed according to the difference between FMV and current value, there is generally no taxable income to report.
The 83(b) must be signed and submitted manually. The IRS does not accept electronic signatures. The form must be mailed to the appropriate IRS office within 30 days of the initial issuance of the stock. It is very important to meet this deadline, as there are no easy fixes if it is missed.
The IRS also requires that the 83(b) must be submitted to the company. This can be as simple as emailing the document to co-founders. It is a best practice to maintain a copy of the 83(b) in company records as well.
It will also be to your benefit to collect evidence that the 83(b) has been filed, as future investors will likely need to see proof of its completion.
The following steps outline common legal advice to this end:
- Send the 83(b) via USPS certified mail
- Keep the receipt and the return receipt (when it is returned)
- Include a brief letter and a self addressed, stamped envelope along with a second copy of the 83(b)
- Ask that the duplicate form be stamped and returned to you as evidence of filing.