Will filing for 83(b) disqualify my incentive stock options?

September 10, 2004

Subject:   Exercise options early
Date:   Mon, 11 Sep 2000
From:   Lonnie


I am allowed to exercise my options early but I still have doubts about what to do. If I decide to exercise all my options now, and then file the 83b form to disqualify the options, can I sell the portions that will be vested after the locking period and pay ordinary income tax as a short term gain? Because I read somewhere on the internet, that by filing the 83b form I will not be able to sell the stocks for at least 12 months. Please advise.



Date:   updated Thu, 9 Sep 2004

Hello Lonnie,

I’m assuming you are dealing with incentive stock options.

Filing a Section 83(b) election in itself doesn’t “disqualify the options.” However, if you are able to exercise what would otherwise be incentive stock options for more than $100,000 of option price of stock in one year, the excess will be converted to “non-qualified options.”

The Section 83(b) election has no effect for ISOs for regular tax reporting.

Filing the Section 83(b) election does not change when you can sell the stock. That is determined by the vesting schedule and employee lock outs.

The gain from an early disposition of an option is generally taxed as ordinary compensation income.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

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