Filing 83(b) After an Early Option Exercise

Early exercising your stock options—purchasing them before they vest—is a powerful strategy, but it opens the door to a critical, time-sensitive decision: filing an 83(b) election. By exercising early and filing 83(b), you can lock in a low tax basis and start the clock on long-term capital gains, potentially saving a fortune down the road.

This guide explains the timelines, tax treatments for both ISOs and NSOs, and the must-know interaction with the Alternative Minimum Tax (AMT) when you pair an early exercise with an 83(b) filing.

Key Takeaways

• The Clock Starts at Exercise: The 30-day deadline to file your 83(b) election begins on the day you exercise (purchase) your options, not when they were granted.
• Tax Treatment Differs for ISOs vs. NSOs: For Non-Qualified Stock Options (NSOs), the bargain element is taxed as ordinary income. For Incentive Stock Options (ISOs), it's not taxed for regular purposes but is counted for AMT.
• AMT is a Major Consideration: Early exercising ISOs with a large bargain element can trigger a significant AMT liability in the year of exercise, requiring careful planning.
• Irrevocable Choice: Once you file, you cannot take it back. If you leave the company and forfeit the shares, you don't get a refund for the taxes paid.

How to File 83(b) on Early-Exercised Options: A Step-by-Step Guide

1. Exercise Your Options: The process begins when you officially purchase your unvested shares from the company by paying the exercise (or strike) price. This transaction is the 'transfer of property' that starts the 30-day 83(b) clock.
2. Calculate the Taxable Income: Determine the 'bargain element'—the difference between the Fair Market Value (FMV) on the day you exercise and the price you paid.
   • For NSOs, this amount is immediately subject to ordinary income tax and withholding.
   • For ISOs, this amount is subject to the Alternative Minimum Tax (AMT).
3. Complete and Sign the 83(b) Form: Fill out the form, describing the property as the shares you acquired upon exercise. Include the number of shares, the price paid, and the FMV on the exercise date.
4. File Within 30 Days: Mail the signed election form to the appropriate IRS service center via USPS Certified Mail. The postmark on your Certified Mail receipt is your proof of timely filing. Do not miss this deadline.

Tax Implications: ISOs vs. NSOs

Incentive Stock Options (ISOs)

ISOs receive favorable tax treatment. When you early-exercise and file an 83(b), there is no regular tax due at the time of exercise. However, the bargain element is counted as income for the AMT. This can be a major trap. If the spread between FMV and your strike price is large, you could face a substantial tax bill, payable in cash, even though you can't sell your shares.

Non-Qualified Stock Options (NSOs)

NSOs are simpler. When you exercise, the bargain element is immediately treated as ordinary income. Your company will likely require you to pay the withholding tax at the time of exercise. The benefit of the 83(b) here is that you pay tax on the bargain element now. Any subsequent appreciation will be treated as a long-term capital gain (if held for over a year), which is taxed at a lower rate.

Frequently Asked Questions

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