> Manually file your 83(b). Don't use Carta to do it. Instead, download the form from the IRS website, fill it out, and mail it to the IRS within the strict 30-day deadline. You'll need to get a signature from your spouse, too.
I could be wrong but last time I checked the IRS doesn't provide an official form for this. It does provide a sample election letter[1] but this sample does not include a space for a spouse to sign. You'd need to include an additional line for this yourself in the letter you draft if you wanted it.
Don't forget: if you do this yourself make sure to mail it certified mail with return receipt as physical evidence that it was delivered.
A few months after delivery you can also call any IRS service center and ask them to verify they have the letter on file (these days everything is scanned into the system so any IRS person can find it vs. having to call the center that received it).
It's important to also get the certified mail receipt physically postmarked by the USPS (it is possible to send certified mail without that). Also, it's a common best practice to include an additional copy of the election along with a self-addressed stamped envelope, and ask the IRS to date-stamp the copy and send it back to you.
> The article from the Khanna Law website is incorrect. There is no guidance or authority that requires the spouse of the service provider to sign the 83(b) election. The article indicates that if a service provider lives in a community property state like California, the service provider's spouse must file the 83(b) election form, presumably because the spouse acquires an interest in the stock. But there is no guidance to that effect. Rather, Treasury Regulation Sections 1.83-2(a) and 1.83-2(e) are quite clear that only the service provider is required to sign the election form without regard to who will have an interest in the stock subject to the election.
Take that for what you will. IANA/tax advisor etc.
EDIT: There's also a great explanation of why this seems to be a nonissue by gamblor956 at the bottom of the comments, who is a purported tax lawyer (I'm not sure why their comment is not more upvoted): https://news.ycombinator.com/item?id=38972557
It seems to be a non-issue to me. From my attorney a few months back:
"We follow the practice of major law firms in the venture space and do not include a spousal consent for the 83(b) election in community property states. We also confirmed with our tax counsel, and they confirmed our approach is advisable."
No one should lose sleep over it. Spouse didn't sign off on a $500 payment to buy restricted stock (early startup stock), so IRS will come down heavily on you for material harm --- will not stand in court!
In other words, there are nine states, however that statistic is nearly meaningless. CA and TX alone count for about a quarter of the nation's population; altogether probably a third of the population is domiciled in community property jurisdictions.
Also, the states of Tennessee and South Dakota have passed elective Community
Property Laws, so even your "less than 10" statistic is not unquestionably accurate.
Sure, but notably not the majority. It's predominantly a west / southwest thing. So GP's advice should caution that that specific legal advice doesn't apply to most people in the US.
Excellent point. Many don't understand that 83(b) only applies to property that has been transferred but not vested. Sometime people mistake a lock-up period on selling stock as equivalent to not being vested -- it is not.
83b seems like one of the most esoteric and user unfriendly IRS mechanisms ever. There's no official form. There's no way to file it online. The recommended approach is to use certified mail return receipt which for most people requires a trip to the post office, and in my experience the IRS fails to return them regularly, in which case you are relying on your own records and your copy of the receipt for a potential tax audit many years down the line.
You'd be hard pressed to design a more taxpayer unfriendly process. I thought it was great when Carta automated these because it's always been a friction point for myself and founders I've worked with.
Very few tax elections have an "official form". Meanwhile, other tax elections are made all the time without even realizing it (for example, spouses filing a joint return are making an irrevocable election to do so).
>You'd be hard pressed to design a more taxpayer unfriendly process.
Obviously you don't know much about auditing partnership tax returns. :-)
The IRS generally treats an 83(b) filed by either spouse as jointly filed by the union if they file a joint tax return. Whether they are in a community property state or not is irrelevant from the perspective of federal taxes because the marital joint return already deals with this situation: essentially, the union is treated as a single taxpayer.
(And yes, for those of you who are wondering: a federal tax statement/election signed by one spouse that files a joint return can bind both spouses for federal tax purposes...)
As written, neither 83(b) nor its regulations (specifically 1.83-2, which outlines the requirement for the election) require spousal consent to an 83(b) election, because they are not the person earning the income. The regulations specifically state that the statement is filed by the "person who performed the services." They then pay taxes pursuant to the 83(b) election with the joint tax return, meaning that both spouses have paid their federal tax liability with respect to any future sale.
If this were not the case, the spouses of hundreds of thousands of CA tech workers would owe tens of billions of dollars in back taxes. It would be front page news. But it's not, because it's not actually how federal taxation works...
Note that things get a bit more complicated if the spouses get divorced by the time of the sale of the stock subject to the 83(b) election. Because both spouses (are deemed to have) paid taxes on the 83(b) stock due to the 83(b) election, absent a prenup or postnup generally the 83(b) stock is treated as marital property and the proceeds are similarly marital property to be divided in a divorce. In a community property state, the split is 50/50 (I assume the same is true in non-CP states but as I've never dealt with this outside of CA I can't say). However, note that it's still irrelevant as to whether the other spouse signed the 83(b) election, so long as the election was made while they spouses still filed a joint return.
TLDR: for federal tax purposes, not having a spouse sign your 83(b) election is a non-issue, whether or not you live in a community property state.
This person is a tax lawyer and this should be the top comment.
It also matches what I have heard from a well-regarded tax lawyer that advises startups, who advises getting a spousal signature, but from a “why not just get it”, conservative, belts and suspenders approach, but does not view it as needed.
I’d also point out that even when employees receive a form with a spousal signature space included, many fail to get it signed. If this were an issue, it would have widespread consequences well beyond Carta.
>Note that things get a bit more complicated if the spouses get divorced by the time of the sale of the stock subject to the 83(b) election. Because both spouses (are deemed to have) paid taxes on the 83(b) stock due to the 83(b) election, absent a prenup or postnup generally the 83(b) stock is treated as marital property and the proceeds are similarly marital property
Paying or not paying tax has no bearing on what is considered community property. It's also not clear what is "more complicated" about splitting marital property subject to an 83(b) election compared to other marital property.
Paying or not paying tax has no bearing on what is considered community property
Yes, it does. In the event of divorce, in the absence of a prenup or postnup explicitly stating that the [83(b) stock or other income] is one spouse's separate income, the payment of taxes on a joint return is the single most important evidence of whether income is considered marital income or separate income, the legal reasoning being that a spouse would not have paid taxes on the other spouse's separate income.
It's also not clear what is "more complicated" about splitting marital property subject to an 83(b) election compared to other marital property.
The "more complicated" is in comparison to how 83(b) elections are treated if the spouses remain together. It's not a comparison to other marital property, though in general stock in a company that is not yet publicly traded can be extremely complicated to divvy up in a divorce.
> the payment of taxes on a joint return is the single most important evidence of whether income is considered marital income or separate income,
I would expect that in the absence of prenup/postnup, the laws of the community property jurisdiction would take effect, making all earned income community income. Which law or regulation, for example in California, states that federal tax must be paid on income via a joint tax return for it to be treated as community income?
What if in the same year as the 83(b) election, the MFJ return shows no tax liability, due to credits, little other income, large deductions, etc. Does that suddenly make community property law moot?
I wouldn't take chances with the 83(b) election; extra-caution here pays off, just because the stakes are so high. To make founders' lives easier, we automated the whole process at file83b.com – you can prepare, sign, and file the election online (and include your spouse too if relevant by toggling the form).
A situation where parenthesis make a big difference in the headline. This is not an 83 BILLIION dollar mistake, it's referring to 83(b) regulation. Just pointing that out for possible headline correction to de-sensationalize it.
Thanks. As a married cofounder myself living in California, if I were to early exercise my own stock options and file the election through Carta, my election could be invalidated by the IRS since my wife did not also sign it. This could lead to very unfavorable tax treatment on my personally held stock.
To mitigate these risks, it appears I should advise our general counsel and HR director about this issue with Carta immediately.
This isn’t the sort of thing I expect people to “get in trouble” for at the time of filing. I expect that years later, if the startup turns out to be worth something and the taxpayer is audited, the auditors will go through old paperwork and discover a very large amount of taxes they can collect.
I think we understand that an auditor could, in theory, do that, but the question is whether auditors do, in practice, do it. The IRS is not supposed to be screwing people on technicalities like this, and a reasonable auditor should conclude that the spouse obviously would have signed had they known they needed to. Regulation isn't interpreted by computers, it is interpreted by humans who can make reasonable adjustments for these sorts of mistakes.
So, does anyone known of someone who actually got screwed by this in an audit? I'm sure it has happened often enough that at least someone out there has been audited who would be affected.
They would also need a court to agree with the ruling, and the fact that the person had no reasonable way to properly sign the document is likely to hold a lot of sway in court.
Correct! We've always included spousal signatures on 83(b) elections. I would say the vast majority (if not all) forms I've seen from good law firms have explicit places for the spouse to sign.
My question is not a joke.
It's comes down to this: how you would like to be treated if the situation was reversed?
What sort of world are we creating that if we see a problem, some people would rather complain publicly vs take your concern to your vendor/partner directly to get it resolved?
(I don't know if this attorney went to Carta first, before publishing. )
It's a joke in reference to the founder of Carta acting bitter upon being caught with his hand in the cookie jar, wherein said founder says that the person who posted about the incident on Twitter should have talked to him first, "founder-to-founder":
If we consider blogs to be journalism, then perhaps we'd expect journalistic practices to be followed. Contacting the company would give them a chance to correct any incorrect information before it was published. That's done for accuracy and fairness.
I could be wrong but last time I checked the IRS doesn't provide an official form for this. It does provide a sample election letter[1] but this sample does not include a space for a spouse to sign. You'd need to include an additional line for this yourself in the letter you draft if you wanted it.
Don't forget: if you do this yourself make sure to mail it certified mail with return receipt as physical evidence that it was delivered.
A few months after delivery you can also call any IRS service center and ask them to verify they have the letter on file (these days everything is scanned into the system so any IRS person can find it vs. having to call the center that received it).
[1] https://www.irs.gov/pub/irs-drop/rp-12-29.pdf