Key takeaways
Introduction
Disclaimer: 83(b) applies to traditional stock (equity) and digital assets (tokens) in certain scenarios. For our audience, we'll focus on digital assets. This is for informational purposes only and not legal, accounting, or tax advice -- please consult with your tax and legal professional to see if this applies to you.
Token compensation often involves complex tax implications and strategies to maximize financial gain.
One of the most critical elements in this landscape is the 83(b) election, a tax provision that significantly impacts US-based employers and employees.
As an employer — understanding the nuances of this election is crucial in order to optimize your employees’ tax obligations and help them (and you!) avoid unwanted penalties.
Executed correctly, the 83(b) election can be a significant financial gain for your employees.
In this post, co-authored by Michael O’Grady, CPA from Cryptedge and Liquifi, we’ll break down:
- What an 83(b) Elections is (and why they matter)
- Employer best practices during an 83(b) election
- What key information to communicate to your employees during an 83(b)
What is an 83(b) Election?
An 83(b) election allows employees to pay taxes on the total fair market value of their tokens at the time of granting rather than at vesting.
This election is particularly beneficial for startups or companies where token value is expected to increase.
Why file an 83(b) Election?
There are a few reasons to file an 83(b) election:
- Get taxed at a lower value (i.e. at the time of grant) as opposed to at a vesting milestone, when the value is significantly higher
- Not needing to worry about a tax obligation you can’t pay due to the inability to sell tokens to cover for tax purposes (i.e. due to low token liquidity, lockups, or tokens not being easily tradeable)
The Role of Employers in 83(b) Elections
As an employer, you’re navigating a delicate balance when dealing with 83(b) elections.
It’s imperative that you provide the correct, relevant information to your employees without directly advising or influencing their decision.
Best Practices for Employers
- Informing Employees: Clearly communicate the option of an 83(b) election, ideally during the initial grant of restricted tokens.
- Resource Provision: Offer resources (CPA and lawyer references) where employees can seek independent advice. At Liquifi, we work with a trusted network of partners who can provide crypto-native tax expertise to all our customers.
- Record Keeping: Maintain meticulous records of who has elected for 83(b) and ensure all documentation stays in order.
Tracking 83(b) Election Submissions
Tracking 83(b) employee election submissions is a vital part of this process.
As an employer, you should set up a system to monitor who has elected the 83b and who hasn't. The biggest benefit of tracking employee 83b elections is to reduce scenarios where an employee(s) misses the 30-day deadline for submission. A proper system also helps you prepare for financial audits, tax filings, and compensation reports.
It’s also vital to make all your employees aware of the critical 30-day deadline for submission.
If your employee submits for the 83(b) election and misses their deadline to submit the proper forms…you, as the employer, are obligated to pay those taxes.
How to handle missed deadlines if your employee DOES file for an 83b election
Scenario: your employee elects to file an 83(b) election, then misses the deadline to submit the proper forms.
In this case, you—as the company—can now face significant tax implications.
It’s critical to provide your employees with trusted resources, lawyers, and/or CPAs if this happens.
How to handle missed deadlines if your employee does NOT file an 83b election
If your employee does not elect to file an 83(b) election, you’ll be subject to standard taxation rules.
You’ll be taxed on the value of the tokens on the settlement date—which could be at a much higher value (and therefore a higher tax amount paid)—as opposed to being taxed when the value is significantly lower.
What does filing an 83b election mean for employees
It’s critical that you help your employees understand the implications of an 83(b) election.
Making this election means they’re taxed on the grant date based on the token’s current value, which can be beneficial if the value of the token increases.
That said, there’s also a risk if the value decreases.
Every employee is responsible for assessing the pros/cons of the 83(b) election for themselves.
As their employer, your job is to provide them with the correct information and steer them towards external resources that can help them make an independent decision.
Why employees might elect for an 83(b):
- They believe the token value will go up in the future, which means it makes more sense to pay taxes on the bill upfront.
- They can afford to pay the upfront tax bill, and they believe it's worth it to do so — even if they decide to leave the organization or the organization shuts down.
In conclusion: the 83(b) election is a powerful tool for token compensation that offers potentially significant tax benefits.
It also requires careful financial consideration and management.
Both employers and employees must stay well-informed and proactive to handle this aspect of compensation in a way that maximizes benefits and minimizes risks.
Next Steps
Over the last 2+ years, Liquifi has helped 50+ companies with over $300MM+ of automated token distributions for their teams, stakeholders, and contributors. Over this period, we work with reputable partners and experts who have navigated this situation for our shared customers.
For help with accounting for digital assets, tax advisory, filing, or anything related to digital assets, tax planning, or token compensation, reach out to the Cryptedge team at their website or at admin@cryptedge.net.
If there’s any way we can support you with tailored solutions for compliant token vesting operations or processes — don’t hesitate to reach out to the Liquifi team at bd@liquifi.finance.
Or book your demo here.
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