Non-Statutory Stock Options (NSOs) and the 83b Election: Understanding the Tax Implications

When it comes to tax planning for employee stock options, one of the key decisions involves whether to file an 83b election, which is designed for restricted stock or other property subject to vesting.

Understanding the 83b Election

The 83b election allows employees to recognize income at the time of grant rather than at vesting, which can be advantageous for tax purposes. However, itrsquo;s important to note that this election is not applicable for Non-Statutory Stock Options (NSOs). This is because NSOs have a different tax structure and their tax events occur at the time of exercise, not at the time of grant.

NSOs and the Timing of Tax Events

The tax event for Non-Statutory Stock Options occurs when the options are exercised, not when they are granted. Upon exercising the options, the difference between the exercise price and the fair market value of the stock is considered ordinary income at that time. Therefore, making an 83b election for NSOs is not a viable strategy.

Income at Option Grant for NSOs

Typically, there is no income realized at the time an NSO is granted. Once the options are exercised, the character of the underlying stock received at exercise determines the tax treatment. If the employee receives the stock with no restrictions at exercise, the difference between the fair market value (FMV) and the exercise price is taxed as ordinary income.

Restricted Stocks and 83b Election for NSOs

If the employeersquo;s right to the underlying stock remains restricted or subject to a risk of forfeiture after exercising the NSOs, they can make an 83b election to realize income at the time of exercise. They can also choose to defer the realization of income until the restrictions lapse and the underlying stock is fully vested.

Key Points for NSOs and 83b Election

Make an 83b election for restricted stocks, not for NSOs. For NSOs, the tax event is at the time of exercise, not at grant. NSOs can still benefit from 83b election if the underlying stock remains restricted after exercise.

Further Reading

For more details on how to file an 83b election and reduce AMT tax on stock options, please visit the following resources:

ISO Tax Form Reduce AMT Tax on Stock Options by 83b

Understanding these nuances can help optimize tax strategies for employees with stock options, ensuring they make the most of their benefits while minimizing their tax liabilities.