Carta's 83(b) Oversight: A Tax Trap for Married Startup Employees

Bad Tax Consequences to Early Exercising in Carta

If your company is using Carta's platform to manage employee stock options, there's a blind spot in the 83(b) election feature you need to know about if you're married and living in a community property state like California.

Here's the deal: Many startups offer early exercise of stock options, which can provide a big tax advantage to employees. Early exercise turns stock options into restricted stock, which normally requires an 83(b) election by the employee to avoid possible painful tax consequences as your stock vests.

Carta conveniently allows you to make the 83(b) election when you early exercise. However, the platform misses one IRS mandate: if you're married in states like California, Texas, or Washington, your spouse must also sign the 83(b) form. Miss this, and you might face some serious tax headaches down the road, as the IRS could invalidate your election.

Carta does not provide a way to have your spouse sign the 83(b) form that they file on your behalf. They also don't conspicuously warn you about this requirement nor that their platform is non-compliant with it. Startups can't even disable the 83(b) feature to prevent the risk that a married employee uses the feature. It seems like a major oversight, especially since Carta is the most popular platform for managing startup stock options.

So, what should you do if you're in this boat? 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.

If you're in a community property state, this rule could apply to you. Check with your lawyer. Until Carta resolves this, it's up to the companies and their employees to navigate this.