Penn State University - Smeal College of Business
PSU search
Student Exchange Smeal site map Contact us Accounting faculty directory

Steven Huddart picture
 
Should I exercise my stock options?
 
 
Research
 
Case Studies
 
Courses
 
 
Stock compensation glossary
 
Compensation links
 
Securities law links
 
Tax links
 
 
Office hours and location
 
Facts About The School
 
Home | Previous | Next | Huddart Site Map

Section 83(b) election


Under the usual Internal Revenue Code rule for restricted property (including, e.g., restricted stock acquired on exercise of employee stock options), income tax is postponed until the property is no longer subject to a substantial risk of forfeiture or the property is transferable. However, a service provider (including an employee) may elect to be taxed in the year of transfer rather than waiting until the property restrictions lapse. If the election is made, the recipient of restricted property is treated as receiving ordinary income to the extent of the difference, if any, between the fair market value of the property without regard to any lapse restriction and the amount, if any, the recipient paid for the property. In the case of stock options exercised before an IPO, the difference between the Strike price of the option and the Fair value of the stock acquired on exercise may be small. Hence, the tax due is also small. An advantage of early exercise in this case is that appreciation in the value of the stock subsequent to exercise is taxed at the lower capital gains tax rate.

The election must be made by the person who performs the service for which the property is received. A taxpayer making the election must notify the person for whom the services were performed that he has elected early recognition of income on the property. The election must be filed not later than 30 days after the date the property is transferred.


Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
huddart@psu.edu
vCard
Home | Previous | Next | Huddart Site Map

http://personal.psu.edu/sjh11/OptionGlossary/Section83belection.shtml
was last updated on Tue, Aug 21, 2018.
Today is Thu, Sep 19, 2019.

Unless otherwise noted, all material is:
Copyright ©1995-2018 Steven Huddart. All rights reserved.