How to fix 83(i) — Vieje Piauwasdy

The market is volatile and we keep seeing massive recoveries followed by drops. A $2T stimulus package was finally passed and signed by Trump. America is finally first again… in the coronavirus cases. I’m in a very somber mood today. It was a really tough week overall — lots of highs and lots of lows and my emotions are all over the place.

I need to rest and recover this weekend. I plan to do a bit of work over the weekend, but mainly on stuff I am excited about so I can recharge and head into next week in a more positive mood.

I wrote a post a couple days ago about how Section 83(i) falls short for stock option holders. I’m adding the second part to the primer where I discuss how to fix 83(i). I am hoping to share the final product once it’s ready, but for now, I’m keeping things confidential and only sharing my primer.

Here you go:

Many employers will be forced with the tough decision to lay off employees to cope with the crisis. In turn, many employees will be left with vested stock options in which they likely do not have the cash to exercise, especially given the circumstances. The unfortunate reality is that if executed correctly by the IRS and Congress, the 83(i) election could have been a much needed tax break for employees affected by the COVID-19 crisis.

Nothing is simple in U.S. taxation, but there may be a few “simple” tweaks that may be what taxpayers need today.

Change the 80% rule to require employers to offer options (ISO, NSO, etc.) and RSUs to 80% of employees. This eases the administrative burden of tracking ISOs, NSOs, and RSUs to each meet the 80% rule separately while maintaining the intent of the rule.
Remove the requirement that forces employers to hold 83(i) stock in escrow. The escrow is an excessive requirement to ensure that the employee pays the tax bill in the future. People buy and sell assets including stock, cryptocurrency, etc. on a daily basis and they are required to self-report any gains/losses to the IRS. This should be no different.
Allow the employee to defer the income taxes associated with exercise today, but allow the employee to surrender stock back to the company without paying that tax when the deferral period is over. This allows the employee to make the decision on whether to pay up the taxes associated or allow the stock to effectively expire preventing the difficult situation where an employee is required to pay tax even on worthless stock.