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In 2016 I filed an 83(b) election for some ISOs I received as part of my employee compensation. I did not completely understand the 83(b) election when I made it, I still don't to be honest. There are resources online saying different things. I expected the company to do very well in the coming years (it has) which is why I filed the 83(b).

I did not realize I needed to send a tax payment to the IRS at the same time, or within the same year I filed the 83(b). So I filed the 83(b) and the IRS sent me back one of my elections letters (I sent multiple so they could send me back a date stamped copy) with a date stamped on it, acknowledging they received the election.

Question is, where do I stand with my options and the IRS if I never paid taxes but filed the election? Is my election still valid? If not is there anything I can do to make it valid?

  • Did you include a copy of the election when you filed your taxes? – David Schwartz Jan 3 at 1:33
  • No I did not send them a copy because I had already sent them the election when I made it. – Audus Jan 3 at 1:35
  • I think you're okay. The requirement was officially eliminated for property transferred on of after January 1, 2016. It was unofficially eliminated for property transferred in 2016. – David Schwartz Jan 3 at 1:39
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An 83(b) election generally doesn't apply to ISOs except when it comes to AMT or disqualifying sales. If you exercised at the time that you filed your 83(b) election you will have started the clock on long-term gains treatment for tax purposes as well as established the FMV of the stock based on the date.

For example -

You receive 1,000 shares at $10 and you exercise at $20, there's no income for ordinary income taxes to report with ISOs. However there would be income tax for AMT purposes. If you then sell at $20, you would pay capital gains taxes on the difference of ($20-$10)x number of shares.

If instead you received the shares, exercised immediately and filed an 83(b, and the stock rises to $20 when you sell (in a qualifying disposition) then you would avoid AMT taxes and only pay long term capital gains.

Note that for ISOs no federal income has to be reported until sold, you do need to report the income for AMT purposes though.

A qualifying disposition is relative to the time you hold the ISOs - one year and one day from buying the shares and 2 years from when you were given the ISOs. Note that the IRS views the stocks given to you when they vest, not when you file the 83(b).

Your standing with the IRS depends on whether or not you exercised, if you reported that exercise when assessing whether or not you needed to pay AMT, and whether you have sold any shares (qualifying or disqualifying disposition).

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