Should I File an 83(b) Election When My Exercise Price Equals Fair Market Value?
Yes, absolutely. Even when your exercise price matches the current fair market value, filing an 83(b) election is typically advantageous. Here's why: without this election, you'll owe taxes on every vesting event as your stock appreciates in value.
The Key Difference
Without 83(b) election: You pay ordinary income tax on each vesting date based on the stock's current fair market value
With 83(b) election: You pay all ordinary income tax upfront when you exercise, locking in today's valuation
Since you're exercising when the stock value is relatively low, your upfront tax burden will be minimal compared to the cumulative taxes you'd face over multiple vesting periods.
A Clear Example
Let's say you exercise options for stock worth $1.00 per share today, and the company grows steadily:
Without 83(b) Election:
Month 1: Stock worth $2.00 → Pay tax on $1.00 gain
Month 2: Stock worth $3.00 → Pay tax on $1.00 additional gain
Month 3: Stock worth $4.00 → Pay tax on $1.00 additional gain
And so on for each vesting period...
With 83(b) Election:
At exercise: Pay tax on $0 (since exercise price = fair market value)
Future vesting periods: No additional ordinary income tax
At sale: Pay capital gains tax on total appreciation
Common Misconception: When Do I Actually Pay Taxes?
Many people think stock compensation is only taxed twice: at exercise and at sale. This isn't accurate for restricted stock or stock subject to vesting schedules.
The Reality Without 83(b):
You actually pay taxes three times:
At each vesting event - Ordinary income tax on the difference between fair market value and what you paid
At exercise (if applicable) - Additional taxes if you exercise options
At sale - Capital gains tax on appreciation since your last taxable event
With 83(b) Election:
You pay taxes twice:
At exercise - Ordinary income tax on any initial spread (often $0)
At sale - Capital gains tax on all appreciation since exercise
Why This Matters
The 83(b) election transforms what would be ordinary income tax (taxed at higher rates) into capital gains tax (taxed at lower rates for long-term holdings). Additionally, you avoid the complexity and cash flow challenges of owing taxes on stock you can't yet sell.
Important Timing Note
You must file your 83(b) election within 30 days of exercising your options or receiving restricted stock. Missing this deadline means you cannot make the election for those shares.
This information is for educational purposes only and should not be considered tax advice. Consult with a tax professional for guidance specific to your situation.
Tags: 83b, options exercise, exercising options, exercise request