Tax implications when selling LLC units after filing 83(b) election - capital gains question

Wait, I'm confused. So if the OP had NOT filed the 83(b), then what would happen at vesting/sale? Would they pay ordinary income tax on the value at vesting and then capital gains on any appreciation between vesting and sale?

Yes, that's exactly right. Without the 83(b) election, at vesting the fair market value of the units would be taxed as ordinary income. Then, when selling later, only the appreciation between the vesting date and sale date would be capital gain. With the 83(b) election, the OP recognized income at grant (which was $0), so they paid no tax at that time. Their basis became $0, and now the entire gain from $0 to the sale price will be long-term capital gain. This is typically better because long-term capital gains rates are lower than ordinary income rates.

Thank you, this makes so much more sense now! So the benefit isn't eliminating taxes but converting what would've been ordinary income (at potentially higher rates) into long-term capital gains (at lower rates). One follow-up question: Does it matter that these are LLC units which are technically partnership interests? I've heard something about "hot assets" under section 751 possibly changing how gains are treated.

That's an excellent question! Yes, since we're talking about an LLC taxed as a partnership, Section 751 could definitely come into play. If the LLC has what are called "hot assets" (like inventory or unrealized receivables), then a portion of your gain could be recharacterized as ordinary income, even with the 83(b) election. The partnership should provide you with information about any Section 751 "hot assets" on your Schedule K-1 or in supplemental information when a sale occurs. This is why it's often beneficial to have a tax professional review your specific situation when selling partnership interests.

Did it help with actually preparing your tax return or just explaining how things work? I've got RSUs from my company (not an LLC though) and I'm dreading dealing with the tax implications when they vest next month.

Sounds interesting but skeptical. How accurate was it compared to what an actual CPA told you? I had a similar situation and my accountant charged me $600 just to explain how my equity compensation would be taxed. Would this have been cheaper?

It definitely helped with preparing my return. It generated a report I could give to my tax preparer that had all the calculations and relevant tax code sections, which saved me a ton in preparation fees since they didn't have to figure it all out from scratch. For RSUs, it can definitely help explain the tax consequences at vesting and provide strategies for managing the tax impact. The withholding on RSUs is often insufficient so it helped me plan for estimated tax payments.

Wait, how does this actually work? Does it just put you on hold with the IRS for you? I don't get it... couldn't you just call them yourself?

Sorry but this sounds like BS. I've called the IRS plenty of times and while it takes patience, you eventually get through. I'm suspicious of any service claiming to magically get you to the front of the line. What's the catch?

It uses technology to navigate the IRS phone tree and waits on hold for you. When an agent actually answers, you get a call back and are connected to them. It's not magic - it's just automating the frustrating part of waiting on hold for hours. No, it's not just "calling for you" - they have a system that keeps trying different options and tactics until it gets through, which can take hours. But instead of you sitting there listening to hold music, their system does it and alerts you when a human agent is reached.

So if the LLC takes on a bunch of debt, does that mean the OP would have a higher basis even though they didn't contribute any cash? Seems like a weird loophole.

Yes, that's correct. When an LLC that's taxed as a partnership takes on debt, each partner's share of that debt increases their outside basis in their partnership interest. This is because partners are considered to be individually liable for their portion of partnership debt. It's not really a loophole though - it's a fundamental principle of partnership taxation. The increased basis from debt allows partners to take distributions or deduct losses that would otherwise be limited. But remember, when the debt is paid off, your basis decreases accordingly, which can trigger gain if your basis goes below zero.

You'll report it on Schedule D and Form 8949. Make sure to indicate the correct acquisition date (when you received the original grant) to get long-term capital gains treatment. If there are any "hot assets" as mentioned above, the partnership should provide you with that information to report separately.

Thanks for the info! I didn't realize I'd need Form 8949 too. My company is pretty small and I'm worried they won't provide detailed tax information. Is there anything specific I should ask our finance team for ahead of the acquisition?

Ask your finance team for a detailed breakdown of the sale proceeds allocation, including any Section 751 "hot assets" like inventory or receivables that could trigger ordinary income treatment. You'll also want confirmation of your original grant date and any basis adjustments from distributions or debt allocations over the years. If possible, request they provide a draft Schedule K-1 or at least the information that would normally go on one. This will help you (or your tax preparer) properly categorize the different types of income and ensure you're reporting everything correctly on your return.

This is such an important point about documentation! I learned this the hard way when the IRS questioned my 83(b) election during an audit two years ago. Fortunately I had kept the certified mail receipt, but it was a stressful few months until everything got resolved. For anyone reading this - definitely keep multiple copies of your 83(b) election and proof of filing. I keep digital copies in cloud storage and physical copies in my tax files. The IRS doesn't maintain records of these elections, so the burden of proof is entirely on you to demonstrate it was filed properly and on time. Also seconding the advice about checking company reporting - my startup's initial tax documents didn't reflect my 83(b) election status and I had to work with their accounting team to get corrected forms issued.