Section 83(b) elections

A Section 83(b) election is a form that lets the Internal Revenue Service (IRS) know you’d like to have your founder stock taxed at the time of purchase rather than at the time of vesting. In many cases, a Section 83(b) election can save you a significant amount on your future taxes.

If you make a Section 83(b) election, most importantly, you won’t pay taxes when your stock vests. Instead, you choose to pay very little (if any at all) taxes at the time of stock purchase, and you won’t owe taxes until you actually sell your stock.

Atlas files 83(b) elections for all C-corp founders. LLC founders don’t need to file an 83(b) tax election, as equity in an LLC created with Atlas doesn’t vest.

Benefits of the Section 83(b) election for newly incorporated startups

Startup lawyers recommend filing a Section 83(b) election if founders purchase their stock when the company is still at its early stage. If you recently incorporated your startup, are currently a US taxpayer, or plan to become one in the future, this filing could save you a significant amount on future taxes. Not all stock is eligible for a Section 83(b) election, but if you’re incorporating a C corporation through Atlas, your company’s stock is eligible because it’s subject to a vesting schedule of 4 years with a one-year cliff.

Section 83(b) elections for non US residents

If you live outside the US but file US tax returns, startup lawyers recommend making a Section 83(b) election because it might save you on future US taxes.

If you do not currently file US tax returns but think you might become a US taxpayer in the future, making a Section 83(b) election is important. Not doing so could result in additional US tax liability when your stock vests.

If you are not currently a US taxpayer and do not anticipate becoming one in the future, making a Section 83(b) election doesn’t matter because it affects only US tax liability.

The IRS requires a US Taxpayer Identification Number (TIN) at the time of filing. This can be either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). If you don’t have either of these when you incorporate with Stripe Atlas, Stripe informs the IRS that you’re a non-US taxpayer, and you intend to apply for an ITIN upon becoming a US taxpayer. Consult a tax advisor about if and when to get an ITIN.

Tax impact of a Section 83(b) election in detail, with an example

This election impacts when you owe taxes and the amount that you’re taxed on your founder’s stock.

• Without a Section 83(b) election, you aren’t taxed at the time stock is issued to you. However, every time your stock vests in the future, you have to pay ordinary income taxes to the extent your stock value (often referred to as “fair market value”) has increased from the date you purchased your stock. When you sell your stock, you’ll owe capital gains tax on the difference between the value of your stock at sale and the value you were taxed on at vesting. (Capital gains tax rates on property held for more than one year are generally lower than ordinary income tax rates. The length of time you hold your stock is called the “holding period." If you don’t make a Section 83(b) election, your holding period begins when the stock vests.)
• With a Section 83(b) election, you only owe ordinary income taxes at the time of stock issuance to the extent the value of the purchased stock is greater than what you pay. If you pay fully for your stock at the time of your stock purchase, you should owe no additional income taxes. This is because our stock purchase agreement template presumes your stock value equals the issuance price (also called par value), reflecting that your company doesn’t have significant assets in it yet. If your company is beyond the “raw idea” stage, when the stock value as assessed by a 409a valuation is higher than the issuance price, consult with your tax advisor. When you later sell your shares, you’re taxed on the capital gains, which is the difference between the stock’s value per share when you sell it and the value when the stock was issued to you. Another advantage of making a Section 83(b) election is that your holding period begins earlier (when you’re issued the stock), which is typically a year earlier than when you vest the first round of the initial grant.

For example, your company issues you 200,000 shares valued at 0.0001 USD per share and you pay 0.0001 USD per share using cash. With an 83(b), you don’t have an income inclusion in the year the stock is issued as you paid for the value of the shares. If you don’t pay for the value of the shares using cash or other assets, a Section 83(b) election means you choose to include as ordinary income in the year the shares are issued the full value of the stock (20 USD). If half of your stock vests 1 year later and the other half vests 2 years later, you have no tax consequences because you made a Section 83(b) election. If 3 years from now you sell your stock for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 399,980 USD (400,000 USD minus 20 USD).

If you don’t make a Section 83(b) election, you don’t have tax consequences on issuance of stock subject to vesting. However, if the value of your shares is 0.50 USD per share when half vest in 1 year then you would pay ordinary income taxes on 49,990 USD (0.50 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If the value of your shares is 1.00 USD per share when the second half vest in 2 years from issuance, then you’d pay ordinary income taxes on 99,990 USD (1.00 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If you sell your stock in 3 years for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 250,000 USD (400,000 USD minus 20.00 USD paid for the shares, minus 149,980 USD).

Non-founder employees receiving stock subject to vesting are also eligible for a Section 83(b) election, but might have additional tax considerations at the time of stock issuance. We suggest they consult with their tax advisors before making the election.