[jpdoctor]

They almost certainly don't understand the story: It's more likely worse than they are mentioning.

Most reporters have never heard of the 83B election. tl;dr = Zuck already paid the tax on his options for exercise, at par (0.001 $/share is typical.)

The tax system is truly brain-damaged.

[RyanGWU82]

Isn't that the whole point of the story? Zuck paid income tax on the initial grant's value (which may be par value), and the stock's appreciation will only be taxed at the reduced capital gains rate?

[jpdoctor]

> Isn't that the whole point of the story?

No, it is not. This sentence in bold tells you they do not understand: "Zuckerberg will be paying taxes on $5 billion in gains from exercising options." If you don't understand why that is different than my comment, then you don't understand the issues of the 83B election also.

Now, odds are you a smart person. And that is my point: It doesn't matter how smart you are; The vagaries of the tax law are so numerous and extreme and obscure that you can only come to the conclusion: The tax system is truly brain-damaged.

[jadc]

Thank you for the 83(b) mention. The article completely glosses over that.

[furyofantares]

Can you please explain it?

[jpdoctor]

First, IANAL. Second:

83b election essentially says: Dear IRS, I know I received all these unvested unexercised options, but I want you to tax me on them as though they were all exercised when I received them. You do this in the year they are assigned to you.

Since this is before the company actually takes funding, the shares are worth some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since he was not making much money, that amounts to maybe $200 of income tax on 1M shares.

When he goes to exercise the options, no income tax is paid because he already paid it! He can use those share for ALL SORTS of collateral for the future. As long as he doesn't actually sell the shares, no income tax is due.

[SatvikBeri]

Thanks for the explanation. I'm trying to understand whether 83b elections would apply to me-I'm an employee who received options that will vest over a certain number of years. Should I be making a 83b election every time part of my options vest? I expect the fair market value of the stock in the future to be higher than when I receive my options.

[jpdoctor]

First, I am not knowledgeable enough to provide advice.

With that in mind: My experience is that it makes sense to go the 83b route before any funding rounds (when the price is 0.001 $/sh).

After that, there is usually decent money going out the door to the IRS. Since such a tiny fraction of startup shares are ever worth a damn, it just isn't worth the time, money or hassle.