A tax filing that allows a holder of security, which was received as compensation and is subject to forfeiture (i.e., unvested stock), to pay taxes upon the receipt of the restricted stock rather than on the date the stock vests to avoid paying tax at the higher ordinary income rate and to be eligible to pay tax at the lower capital gains rate.
Practically speaking, this tax election allows an individual to include (as income) the fair market value of property received as compensation which is subject to forfeiture and is non-transferable. With that said, this election generally does not need to be counted as income until the property becomes transferable or the filer suddenly gets to keep the property. Section 83(b) will allow you to choose to be taxed upon receipt of eligible property instead of waiting until it becomes transferable or you are allowed to keep it.
Why choose to be taxed earlier rather than later… especially if there is a risk you won’t be able to keep the property? Sometimes being taxed before an asset appreciates ensures a lower tax bill or no tax owed whatsoever. At other times, there are capital gains holding period issues to consider. Please note that this election does not need to be made for fully vested shares of restricted stock.
If your eyes are glazing over, that is okay. You can really let your tax attorney handle this one.
Accountant: “Well, you can wait to treat this as taxable income but I have a strong sense it is going to appreciate significantly before it becomes transferable so perhaps we should file a Section 83(b) election this year.”
Client: “I brought you a coffee and a donut. Please do whatever you think is best. I did three shots of espresso before this meeting and I’m still falling asleep. Call me when you need me to sign something.” (Leaves.)