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What happens if I missed the 83(b) election deadline?

83(b)EquityTax

The shares are taxed as they vest instead, on whatever they are worth on each vesting date, and there is no way to file late. The 30-day period is in the statute, the IRS has no power to extend it, and there is no late-filing procedure, no penalty you can pay to cure it, and no reasonable-cause exception. Once day 30 has passed without a postmark or an online submission, the election is gone for that grant.

What happens instead

Without the election, section 83 taxes the shares when they vest, not when they were issued. On each vesting date, the excess of the shares' value that day over what you paid is ordinary income, at ordinary rates, and for an employee it runs through payroll. For a founder who paid a fraction of a cent per share in a company that later raises money, every vesting date becomes a taxable event on stock that cannot be sold to pay the bill, and the capital gains holding period starts afresh with each tranche. That is the outcome the election exists to avoid.

The workarounds, and what is wrong with each

The company can cancel the grant and issue new shares, which starts a fresh 30-day period. The catch is that the IRS can treat a second issuance that is a rerun of the first as if it never happened, and the shares are now worth whatever they are worth today, so the amount to include in income may no longer be trivial. The company can amend the agreement so the shares are fully vested at issue, which removes the need for an election and also removes the vesting that co-founders and investors rely on. Some founders restructure the grant as options or another instrument. Each of these has a cost, changes the cap table, and has to be papered correctly by board consent, and none of them should be attempted from an article.

If you have missed the deadline, Ask Arabella can walk through what the numbers look like for your grant and which of the options is worth taking to a lawyer, before anything is signed.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.