Generally, there are 2 types of options:

Incentive Stock Options (ISO) – granted only to employees

Date of Grant – no tax to the option holder.

Date of Exercise – no ordinary tax, however, the option holder adds the spread (the time from the Date of Grant to the Date of Exercise) as income in calculating Alternative Minimum Tax (AMT), unless the option holder sells the stock in the same calendar year.

Date of Sale – if the sale occurs both more than 2 years after the option Date of Grant and more than 1 year after the Exercise Date, the option holder is taxed at long-term capital gain rates on the difference between the sale proceeds and the purchase price (plus any amounts taxed as ordinary income for AMT purposes). If these dates are not met, the income will be taxed as ordinary income rates (partly as ordinary income and partly as capital gains).

NSO Non-Statutory Options (NSO) – granted to employees, directors & consultants

Date of Grant – no tax to the option holder.

Date of Exercise – the option holder is taxed on the spread at ordinary income tax rates.

Date of Sale – capital gain rates apply.

IRC 83(b) Election

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of non-qualified stock option at the time of granting.

The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.

Using an 83(b) election may not always be favorable. While it might result in paying less tax, there are still risks involved in using this election.