Q. I am receiving restricted
stock in a company and was given the option of making an I.R.C § 83(b)
election. What does this mean, and
should I make the election?
When given restricted stock, an employee normally recognizes as
ordinary income the excess of the fair market value of the stock received over
the amount (if any) paid for the stock, at the time the employee’s beneficial interest
in the stock is transferable or is no longer subject to a substantial risk of
forfeiture, whichever occurs earlier. This
would be reported on a Form W-2 for employees or Form 1099 for independent
contractors. Gains that occur thereafter
will qualify for capital gains treatment.
I.R.C. § 83(b) permits an employee who has received stock as
compensation to report its value as income in the year of receipt even though
the stock is subject to a substantial risk of forfeiture. If the election is
made, the employee recognizes as ordinary income the excess of the fair market
value of the stock received over the amount (if any) paid for the stock. The employee's tax basis in the stock becomes
the fair market value at the time of receipt. If the stock is later sold for a
greater amount, the employee will realize a capital gain equal to the
In essence, an 83(b) election changes the timing for the inclusion of
income of the stock, from the time when the risk of forfeiture ceases to exist
to the time of its receipt. Making an
I.R.C. § 83(b) election can be advantageous if an employee expects stock
received as compensation to appreciate substantially in value, particularly if
its value is small at the time it is received, since the employee will qualify
for capital gains treatment on the appreciation. The risk of making the I.R.C. § 83(b)
election is that the employee will receive no deduction for the value of the
stock that was reported as income if the stock is later forfeited, thus paying
taxes on a stock that he or she does not have.
An I.R.C. § 83(b) election should be made whenever an employee
purchases his or her employer's stock for its fair market value. The election
will not result in income to the employee because the value of the stock does
not exceed its purchase price, and any future appreciation of the stock will qualify
as capital gains.
An I.R.C. § 83(b) election must be made within 30 days after the employee
receives the stock. I.R.C. § 83(b)(2). An I.R.C. § 83(b) election can be revoked on
or before its due date. Thereafter, the election is revocable with the consent
of the IRS if made under a mistake of fact, but not a mistake of law. Rev. Proc. 2006-31, 2006-27 I.R.B. 32.
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