I wouldn't take chances with the 83(b) election; extra-caution here pays off, just because the stakes are so high. To make founders' lives easier, we automated the whole process at file83b.com – you can prepare, sign, and file the election online (and include your spouse too if relevant by toggling the form).
Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
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Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#32It seems to be a non-issue to me. From my attorney a few months back: "We follow the practice of major law firms in the venture space and do not include a spousal consent for the 83(b) election in community property states. We also confirmed with our tax counsel, and they confirmed our approach is advisable." No one should lose sleep over it. Spouse didn't sign off on a $500 payment to buy restricted stock (early sta…
Do note that there are less than 10 community property states (but it does include CA and WA).
In other words, there are nine states, however that statistic is nearly meaningless. CA and TX alone count for about a quarter of the nation's population; altogether probably a third of the population is domiciled in community property jurisdictions.
Also, the states of Tennessee and South Dakota have passed elective Community Property Laws, so even your "less than 10" statistic is not unquestionably accurate.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#33Note, this only applies to "early exercise" under 83(b), which is exercising an option grant prior to the grant vesting. More info: https://carta.com/blog/early-exercise-stock-options/ Not all startups allow this type of early exercise. If you exercised ISOs/NSOs only after they vested, this problem can't apply to you.
Excellent point. Many don't understand that 83(b) only applies to property that has been transferred but not vested. Sometime people mistake a lock-up period on selling stock as equivalent to not being vested -- it is not.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#3483b seems like one of the most esoteric and user unfriendly IRS mechanisms ever. There's no official form. There's no way to file it online. The recommended approach is to use certified mail return receipt which for most people requires a trip to the post office, and in my experience the IRS fails to return them regularly, in which case you are relying on your own records and your copy of the receipt for a potential…
>There's no official form.
Very few tax elections have an "official form". Meanwhile, other tax elections are made all the time without even realizing it (for example, spouses filing a joint return are making an irrevocable election to do so).
>You'd be hard pressed to design a more taxpayer unfriendly process.
Obviously you don't know much about auditing partnership tax returns. :-)
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#35The IRS generally treats an 83(b) filed by either spouse as jointly filed by the union if they file a joint tax return. Whether they are in a community property state or not is irrelevant from the perspective of federal taxes because the marital joint return already deals with this situation: essentially, the union is treated as a single taxpayer. (And yes, for those of you who are wondering: a federal tax statement/…
>Note that things get a bit more complicated if the spouses get divorced by the time of the sale of the stock subject to the 83(b) election. Because both spouses (are deemed to have) paid taxes on the 83(b) stock due to the 83(b) election, absent a prenup or postnup generally the 83(b) stock is treated as marital property and the proceeds are similarly marital property
Paying or not paying tax has no bearing on what is considered community property. It's also not clear what is "more complicated" about splitting marital property subject to an 83(b) election compared to other marital property.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#36> Manually file your 83(b). Don't use Carta to do it. Instead, download the form from the IRS website, fill it out, and mail it to the IRS within the strict 30-day deadline. You'll need to get a signature from your spouse, too. I could be wrong but last time I checked the IRS doesn't provide an official form for this. It does provide a sample election letter[1] but this sample does not include a space for a spouse to…
If the IRS (hypothetically) doesn't have the letter on file, how would one go about fixing such a problem?
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#37Thanks. As a married cofounder myself living in California, if I were to early exercise my own stock options and file the election through Carta, my election could be invalidated by the IRS since my wife did not also sign it. This could lead to very unfavorable tax treatment on my personally held stock.
To mitigate these risks, it appears I should advise our general counsel and HR director about this issue with Carta immediately.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#38Earlier quoted context omitted.
Do note that there are less than 10 community property states (but it does include CA and WA).
In other words, there are nine states, however that statistic is nearly meaningless. CA and TX alone count for about a quarter of the nation's population; altogether probably a third of the population is domiciled in community property jurisdictions. Also, the states of Tennessee and South Dakota have passed elective Community Property Laws, so even your "less than 10" statistic is not unquestionably accurate.
Sure, but notably not the majority. It's predominantly a west / southwest thing. So GP's advice should caution that that specific legal advice doesn't apply to most people in the US.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#39The IRS generally treats an 83(b) filed by either spouse as jointly filed by the union if they file a joint tax return. Whether they are in a community property state or not is irrelevant from the perspective of federal taxes because the marital joint return already deals with this situation: essentially, the union is treated as a single taxpayer. (And yes, for those of you who are wondering: a federal tax statement/…
>Note that things get a bit more complicated if the spouses get divorced by the time of the sale of the stock subject to the 83(b) election. Because both spouses (are deemed to have) paid taxes on the 83(b) stock due to the 83(b) election, absent a prenup or postnup generally the 83(b) stock is treated as marital property and the proceeds are similarly marital property Paying or not paying tax has no bearing on what…
Paying or not paying tax has no bearing on what is considered community property
Yes, it does. In the event of divorce, in the absence of a prenup or postnup explicitly stating that the [83(b) stock or other income] is one spouse's separate income, the payment of taxes on a joint return is the single most important evidence of whether income is considered marital income or separate income, the legal reasoning being that a spouse would not have paid taxes on the other spouse's separate income.
It's also not clear what is "more complicated" about splitting marital property subject to an 83(b) election compared to other marital property.
The "more complicated" is in comparison to how 83(b) elections are treated if the spouses remain together. It's not a comparison to other marital property, though in general stock in a company that is not yet publicly traded can be extremely complicated to divvy up in a divorce.
Re: Carta's 83b Oversight: A Tax Trap for Married Startup Employees (2023)
#40Earlier quoted context omitted.
>Note that things get a bit more complicated if the spouses get divorced by the time of the sale of the stock subject to the 83(b) election. Because both spouses (are deemed to have) paid taxes on the 83(b) stock due to the 83(b) election, absent a prenup or postnup generally the 83(b) stock is treated as marital property and the proceeds are similarly marital property Paying or not paying tax has no bearing on what…
Paying or not paying tax has no bearing on what is considered community property Yes, it does. In the event of divorce , in the absence of a prenup or postnup explicitly stating that the [83(b) stock or other income] is one spouse's separate income, the payment of taxes on a joint return is the single most important evidence of whether income is considered marital income or separate income, the legal reasoning being…
> the payment of taxes on a joint return is the single most important evidence of whether income is considered marital income or separate income,
I would expect that in the absence of prenup/postnup, the laws of the community property jurisdiction would take effect, making all earned income community income. Which law or regulation, for example in California, states that federal tax must be paid on income via a joint tax return for it to be treated as community income?
What if in the same year as the 83(b) election, the MFJ return shows no tax liability, due to credits, little other income, large deductions, etc. Does that suddenly make community property law moot?