What About Now? – 83(b) Tax Rules Applicable to Early Exercise of Stock Options
Some years ago, I published an article on the importance of understanding the tax rules applicable to equity grants, with a particular focus on being aware of the timing rules for filing an 83(b) election and the importance of making timely elections (available here).
A reader of that 83(b) article approached me recently looking for guidance on when an individual may make an 83(b) election with respect to a stock option. The question was simple – do you make the 83(b) election within 30 days of the grant of the option or within 30 days of exercise of the option?
In general terms, you cannot file an 83(b) election with respect to the underlying stock of an option at the time of grant of the option because an 83(b) election may only be filed in connection with the transfer of unvested property under Internal Revenue Code Section 83. The stock underlying an option is not transferred to the option holder at the time of grant of the option so there is no basis to file the 83(b) election at the time of grant of the option – and typically, the option itself is not treated as property under Code Section 83.
However, some options permit the option holder to exercise an option before becoming vested in the underlying stock (referred to as “early exercise”). We don’t see this too often, but if an option holder is able to early exercise and it makes economic sense to file an 83(b) election in that context, then the option holder should be aware of the need to file that 83(b) election within 30 days of such exercise.
In other words, if unvested shares are transferred at exercise of the option, the option holder must file the 83(b) election (if at all) with respect to those unvested shares within 30 days of the transfer of the shares/exercise of the option.