Why you file 83(b) elections promptly(forbes.com)
forbes.com
Why you file 83(b) elections promptly
http://www.forbes.com/sites/robertwood/2012/02/05/top-tax-tips-from-zuckerbergs-facebook-bonanza/
5 comments
I'm not an accountant, but if I'm reading this correctly, Zuckerberg received 120 million shares at 6 cents each in 2005. A section 83(b) election requires him to purchase those shares first, which would have cost ~$7 million. Additionally, if the options' market value was higher than purchase price, he'd have to pay taxes on the difference.
In order to apply to options, 83(b) requires (among other things) that the options be readily valuable at the time they are issued. In FB's case, it is likely that the stock options could not be valued (i.e,. because they were not publicly traded and there was not a recent valuation study).
See the Regulations to 83(b), which provide a lot more detail about the applicability of 83(b) than the statute itself, especially Treas. Reg. 1.83-7 (regarding stock options).
See the Regulations to 83(b), which provide a lot more detail about the applicability of 83(b) than the statute itself, especially Treas. Reg. 1.83-7 (regarding stock options).
Having lived through the dot.com explosion I swore off ever exercising options with 83(b) ever again.
Think of this way, 83(b) is a 'bet' that your stock will be worth more than you paid for it. You put down real money on hypothetical gains later.
Lets look at the risk/gain in both scenarios:
1) You elect 83(b) and exercise your stock. If its an ISO you will have an Alternative Minimum Tax (AMT) hit whether or not you can sell the stock. Are given an 'early election' option (where you can elect prior to your ISO vesting) you don't get the AMT hit but you have to pay out of pocket for your whole option.
If the stock goes up and becomes tradable you WIN double! Not only can you can claim a long term gains rate rate (20% vs 35%) but you also get the money from selling your stock. If you the stock goes down or away, you LOSE, up to all of the money you spent buying the stock that never became worth anything.
2) You choose not to elect, and wait around.
If the stock goes up you WIN! But only partially, instead of paying 20% federal tax you're paying 35% and instead of capital gains its regular income.
If the stock goes down or becomes untradeable you WIN again. Because you didn't lose the money you would have paid to exercise the stock its still working for you somewhere rather than going into a rat hole.
So option two you don't win as big when your stock takes off but you also don't have a 'lose' option. Typically I advise folks who ask me about 83b to take the money you would have used to exercise your option and buy some publicly traded blue chip stock. If you get a big pay day and can exercise your startup stock for real money, you can sell the blue chip stock to help cover the taxes and get to keep more of your startup stock.
Think of this way, 83(b) is a 'bet' that your stock will be worth more than you paid for it. You put down real money on hypothetical gains later.
Lets look at the risk/gain in both scenarios:
1) You elect 83(b) and exercise your stock. If its an ISO you will have an Alternative Minimum Tax (AMT) hit whether or not you can sell the stock. Are given an 'early election' option (where you can elect prior to your ISO vesting) you don't get the AMT hit but you have to pay out of pocket for your whole option.
If the stock goes up and becomes tradable you WIN double! Not only can you can claim a long term gains rate rate (20% vs 35%) but you also get the money from selling your stock. If you the stock goes down or away, you LOSE, up to all of the money you spent buying the stock that never became worth anything.
2) You choose not to elect, and wait around.
If the stock goes up you WIN! But only partially, instead of paying 20% federal tax you're paying 35% and instead of capital gains its regular income.
If the stock goes down or becomes untradeable you WIN again. Because you didn't lose the money you would have paid to exercise the stock its still working for you somewhere rather than going into a rat hole.
So option two you don't win as big when your stock takes off but you also don't have a 'lose' option. Typically I advise folks who ask me about 83b to take the money you would have used to exercise your option and buy some publicly traded blue chip stock. If you get a big pay day and can exercise your startup stock for real money, you can sell the blue chip stock to help cover the taxes and get to keep more of your startup stock.
I don't see this as "mean government takes $2B" so much as "Mark Zuckerberg nets $3B"
This is outrageous, I can't believe that Zuckerburg did not try any other action after the window closed to prevent paying so much tax.
If your biggest problem is paying a $2 Billion tax bill on your $25+ Billion in earnings then you're doing ok.
he's probably not stressing about it too much.
Restricted Stock is something that 83(b) can help with the tax implications. Stock Options are handled differently and are always taxed at the income tax rate.
If Zuckerberg received Options, then there's nothing he can do with an 83(b) election to get lower taxes.
This stuff is tricky, even for the professionals in this space, and I am certainly not the person to get this advice!