83b Election on RSUs

Restricted stock units (RSUs) are the most common form of equity compensation. When handled properly RSUs are a valuable asset. However, they often create tax consequences that are hard to avoid. Because the taxes are so hard to avoid, people look for unique ways to legally avoid taxes and look to what’s called an 83b election.

We’re frequently asked by readers and financial advisors if it’s possible to do an 83b election on RSUs. 

In case you are wondering, the answer to this question is a definitive NO.

People may get confused on this point because different types of equity have similar names. One type, a restricted stock award (RSA), and another type, a restricted stock unit (RSU) are often confused. Although these equity types have very similar-sounding names, they are completely different and follow entirely different IRS tax rules.

In this article we’re going to explain what an 83b election is, what some of its benefits are, why you can’t do an 83b election on RSUs, and why you can do them on RSAs.

Red flag alert: If you are working with an advisor who suggests doing an 83b election on RSUs, please beware. An advisor who specializes in and understands equity compensation would never make that suggestion.

Yes, we realize that the proper term for an 83b election is actually 83(b) election. When searching for information online, most people don’t use parentheses so you’ll see we use both 83b and 83(b) in this article.

What is an 83b Election?

An 83b election is an election you make that says to the IRS, “Hey I’m going to be getting all this equity in the coming years. Can I just pay the taxes to you now so that my future gains can be treated as long-term capital gains?”

You can also think of making the 83b election like booking a flight really far in advance. You pay for the ticket early so that when the prices go up, you already have your ticket and don’t need to pay more.

We’ll explain the benefits of this further in a minute, but the primary reason you’d want to do this is to save money on taxes.

When you submit your 83b election, the IRS will require you to provide the following information:

• Your legal name

• Your address

• Your social security number/tax ID

• Grant date of the equity awarded and the calendar year

• A description of the stock awarded and number of shares subject to the 83(b) election

• The restriction(s) that the equity is still subject to (for example, a vesting schedule)

• The fair market value of the stock on the grant date 

• The amount paid for the shares (if any) 

• A statement saying you’ve given a copy of the 83(b) election to your employer

They will also require that you sign and date the form and send it to the IRS service center closest to you. (Both sample forms below have a list of IRS service centers.)

So you can see what an actual 83(b) form looks like, here are a couple sample forms for you to look at: 83b election sample form #1 and 83b election sample form #2.

As you can see from the forms, making the election itself is relatively easy. It’s just a matter of remembering to do it and making sure that the equity on which you're trying to do the election actually allows it!

With RSAs, you must complete and send the election to the IRS within 30 days of grant. With Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs), you will need to send the election to the IRS within 30 days of exercise . Remember, RSUs are not eligible for the 83b election.

What Are the Benefits of an 83b Election?

As mentioned above, the primary purpose of an 83b election is to save money on taxes. 

When you complete an 83b election, it changes the date upon which your equity becomes taxable. Rather than paying taxes on that equity in the future, you are instead choosing to pay those taxes upon submission of your 83b election.

Here are a few examples of the impact of using an 83b election on RSAs:

Example of No 83b Election Filed

Assuming no 83b election is filed within 30 days of receiving a grant of RSAs, those RSAs will typically become taxable as the vesting conditions are met (which is usually a time-based vesting schedule).

Here’s an example of what happens when 40,000 RSAs are granted, no 83b election is filed, and the value of those RSAs increases over 5 years:

As the above graphic illustrates, the share value of these RSAs was practically nothing at the beginning but grew rapidly year after year. 

As the share value increased and the RSAs vested, the owner of these RSAs owed taxes on the amount of RSAs vested multiplied by the value on that date.

At the end of four years, the value increased 1,000 times and generated a sizable taxable income.

Example of 83b Election Filed

Now let’s compare the example above with an example of what would have happened if this person had instead filed an 83b election within 30 days of receiving their grant of RSAs.

Please note in the graphic above that at the very beginning of the timeline, this person had to pay taxes on an extra $400 so that future vests would not be taxed as ordinary income. By filing an 83(b) election, this person avoided a huge tax bill. I think all of us would agree that it’s better to pay taxes on $400 at the front-end than pay taxes on $165K at the back-end!

The whole point of the examples above is to illustrate that filing an 83b election allows all the gains experienced from day one (at RSA Grant Date) to the end date (when Fully Vested) to be treated as long-term capital gains, which is far more favorable than treatment at ordinary rates.

The examples provided in the graphics above were intentionally simplified. Please note that there can be some nuances both with the RSAs themselves and with companies requiring employees to pay a small fee for them. Regardless, the strategy of shifting from ordinary income to long-term capital gains remains the primary reason to do an 83b election.

Why You Can’t Do an 83b Election on RSUs

Now that you know how awesome an 83b election can be, it’s time to dig into why RSUs are not eligible for an 83b election.

1. When you receive a grant of RSUs, you haven’t yet received shares of the company. All you have received is a promise from your employer that they’ll eventually give you shares in the future. RSAs, on the other hand, are issued on day one but are given back to the employer if you don’t meet vesting requirements. 

2. RSUs fall under Section 409a of the tax code. The 83b election comes from Section 83 of the IRS tax code. Both of these sections deal with employee compensation, but each has its own distinct rules.

3. Because (with RSUs) you don’t yet own the property, there’s nothing to do an 83b election on. Even with ISOs and NSOs, you must first early exercise before you’re able to file an 83b election. 

We know it’s a bummer that you can’t do an 83b election on RSUs. Please take heart and remember that RSUs are still a great perk. You still have a right to equity in your company and you’ll still benefit when the company’s stock value increases.

Since RSUs follow Section 409a of the tax code, there are some strategies that may allow you to elect to defer when you want your RSUs to vest, but doing this requires considerable planning and you’d need to work closely with a tax advisor who can provide specific guidance.

Why You Can Do an 83b Election on RSAs

If you’re receiving a grant of RSAs, the odds are that you’re working at a startup that isn’t very big (yet). As mentioned above, RSAs have a different set of rules compared to RSUs and, generally, RSAs are considered more valuable.

When you receive a grant of RSAs, you are issued shares of the company subject to certain restrictions (such as working for some period of time or hitting some milestone). The fact that RSA shares are actually being issued to you is what makes RSAs a big deal. It’s this transfer of property that makes you eligible to complete the 83b election. In contrast, with RSUs you’re only receiving a contractual right to shares, but you don’t officially own anything yet.

If you’d like to read Section 83 of the tax code, we’ve linked it for your convenience! (Because who doesn’t like to read the tax code in their free time?!)

We plan to write an article detailing all the similarities and differences between RSUs and RSAs. When we do, we’ll be sure to provide a link.

Final Thoughts on 83b Elections on RSUs

It’d be really interesting if it were possible to file an 83b election on a grant of RSUs. However, the ability to do that would likely turn it into more of a gamble than wise tax strategy. Since RSU grants are the form of compensation typically provided by larger companies, and in large companies there’s more opportunity for stock prices to go down, filing an 83b election on something with a lot of room for a drop probably wouldn’t be ideal.

Not being able to do an 83b election on RSUs may seem like a huge bummer, but there are still strategies you can use to avoid taxes on RSUs. Remember, RSUs are still a great form of equity compensation and, if managed well, they can still provide the means to achieve many of your personal finance goals.

Thanks for reading and be sure to reach out with any questions!