When you’re given equity in a company as part of your compensation, you are generally required to pay taxes on the value received, just as you would on any other cash compensation that you receive.

How much of the equity grant is considered taxable? When is it considered taxable? That will depend on the fair market value of the equity you receive and whether it is subject to a substantial risk of forfeiture, such as vesting.

For example,

Say your company grants you stock that is subject to a 5 year vesting schedule and you are not required to pay anything for the stock awarded to you. You would generally be taxed each year on the fair market value of the shares that vested during the year. Hopefully the value of the stock rises during this 5 year vesting period, in which case you will be paying an increasing amount of tax each year as you vest in the stock.

But a Section 83(b) election could be a good strategy in preserving more of that appreciation in value occurring during the vesting period as capital gain when you dispose of the stock, rather than compensation income.

Find out how in our article, “You Could Benefit from an 83b Election”