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Subject:   83b
Date:   Thu, 28 Apr 2005
From:   Sarah

I was at a company that went public last October. Before going public, we employees were given the opportunity to exercise our options early. I exercised all of my options, filled out an 83(b) election and mailed it to the IRS.

I left the company this year, and they repurchased the unvested shares.

I just prepared my income tax returns and neglected to indicate that I exercised the options early and that some of the shares have since vested. Was I supposed to indicate this on my income tax return? If so, where was I supposed to indicate this and how can I rectify the situation?

Answer

Hello Sarah,

I am assuming your options were non-qualified options. The 83(b) election is only effective for AMT reporting for ISOs.

Any ordinary income should have been included in your wages on your W-2 form and reported on your income tax return for the year of exercise.

There is no box to check or form to report exercising the option. You should have attached a copy of the 83(b) election to your income tax return and provided an executed copy to your employer. Otherwise, you notified the IRS about the transaction when you filed the 83(b) election.

I suggest that you file a Form 1040X with a copy of the 83(b) election attached "for information."

Once you have filed a Section 83(b) election for exercising an non-qualified option, vesting has no tax effect.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.