Do I have to file an 83b as a startup advisor?

Answer by Wray Rives:

There is no requirement that you ever file an 83(b) election, doing so is completely optional.  When you receive restricted assets, such as stock options with a vesting schedule, you are not required to report the receipt of that asset as income, until you have the full rights to sell that asset or otherwise convert it into cash.  The restricted stock is not income in your hands until whatever restrictions, commonly a vesting schedule, expire.  Upon expiration of the restrictions the stock becomes taxable income to you at whatever the fair market value is in the future when the restrictions expire.

What an 83(b) election does

What an 83(b) election does is accelerate the recognition of income to today rather than in the future when the restrictions expire and fix the current taxable income at the today’s fair market value rather than the future fair market value.  When you sell the stock in the future, you pay capital gains tax on the appreciation in value from today until you sell the stock.

Obviously stock in a startup typically will have a low current fair market value. If the startup is successful the future fair market value could be significant.  Making an 83(b) election means you pay capital gain tax rate rather than ordinary income tax rates on that increase in value.  The risk is not every startup succeeds and you are paying some current ordinary income tax today. If the stock value does not go up, you have a capital loss in the future rather than never having to recognize the income at all.

So while there is no requirement to file an 83(b), if you don’t you will miss out on the opportunity to pay lower tax rates on any future appreciation in value of the stock.

Do I have to file an 83b as a startup advisor?