[inmygarage]

IANAL, but I do not believe you can file an 83(b) election for options. You can only file an 83(b) for NSOs or restricted stock. I am not sure if, post-exercise, the options become "owned options" or "restricted stock" and how the IRS views the difference between the two.

[BrandonM]

Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.

[Osiris]

And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.

[BrandonM]

But wait, there's more... Let's say that you decide it's too risky to early exercise in year 1, but by year 3 things are looking pretty good and you early exercise all your options.

Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500 spread in year 3, even though you don't technically own those year 4 shares yet.

Then, you leave or get fired 3 months later. Pursuant to the early exercise agreement, the company can repurchase 1,875 shares at your $0.20 strike price, giving you $375 back. Unfortunately, AFAICT, there's no way for you to reclaim the tax you paid on the $1,031.25 spread for those 1,875 shares; you just eat it.

Yeah, this stuff is complicated, and sadly it seems to fall to each startup employee to educate themselves.

[teej]

Err, are you sure you can't take a capital loss on the $1,031.25 spread?

Not that I would benefit personally. I am still burning through years of capital loss carryover from ZNGA.

[BrandonM]

Section 4.03 of IRS bulletin 2012-28 (https://www.irs.gov/irb/2012-28_IRB/ar12.html) states, "If property for which a § 83(b) election was filed is forfeited while substantially nonvested, § 83(b)(1) provides that no deduction shall be allowed with respect to such forfeiture. Section 1.83-2(a) further provides that such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of (1) the amount paid (if any) for such property, over (2) the amount realized (if any) upon such forfeiture. If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss."

I'm not an accountant nor a tax expert. My layman's understanding of that clause is that (1) the amount paid was $375, and (2) the amount realized was $375, so the buyback nets $0.

Could the nonvested shares somehow be defined as "a capital asset in the hands of the taxpayer" with a cost basis of the FMV at exercise time, even though they're not technically property of the taxpayer yet? Perhaps it depends on the specific terms of the early exercise and the buyback?

[rhizome]

Yeah, it's a little annoying to read all of these context-dependent details from people calling those who don't know them "naive."