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Lesson 15. More Strategies and Tips > Section 83b - Pg. 72

More Strategies and Tips 72 A note of explanation is in order. Section 83b is a provision that allows you to pay taxes now on unvested stock. The idea is that if you believe the stock is going to show a significant increase during the vesting period you can elect to pay taxes now on the unappreciated stock. Under normal circumstances, you would pay compensation income tax on the value of vested stock when you receive it. Unvested stock is not taxed until the restriction expires. At that point the gov- ernment rules say you have received the stock. If you use the Section 83b election, you pay taxes on the value of the unvested stock when you receive it. Later, when the appreciated vests, you don't owe any taxes. Section 83b election treats unvested stock as if it were vested. If you sell the vested stock, the IRS treats it like any other sale depending on the holding period. Here's how it might work. Say you receive unvested stock worth $10,000. During the vesting period, the company announces it has discovered a cure for obesity. The stock shoots up in value to $100,000 before the vesting period ends. Tip You hire experts to keep track of obscure tax rules. Under normal circumstances you would report no income when you receive the stock, but would report $100,000 in ordinary income when the stock vests. If you take the Section 83b election when you receive the unvested stock, you can pay taxes on the $10,000 value at that time. Taxpayers in the 36-percent tax bracket would face a $3,600 tax bill. Without the Section 83b election, you would owe $36,000 in taxes. You don't need a calculator to see the value in taking the election. Where do options fit into this scenario? Some companies grant options on unvested stock. This may seem strange, but it does happen. When you exercise your options, you still don't "own" the stock