Enter the 83(b) election — one of the most powerful yet misunderstood tax strategies in equity compensation planning. By proactively choosing to be taxed at the time of grant instead of at vesting, you can potentially save hundreds of thousands (or even millions) in taxes and maximize the after-tax value of your equity.

Used correctly, the 83(b) election can turn a modest tax bill today into a massive tax advantage later. Used incorrectly — or forgotten entirely — it can result in missed opportunities and painful surprises.

What Is the 83(b) Election?

The 83(b) election is a provision of the U.S. tax code (Section 83(b) of the Internal Revenue Code) that allows recipients of restricted stock or early-exercised stock options to accelerate the recognition of income to the date the stock is granted, rather than when it vests.

Here’s how it works:

• Without an 83(b): You pay ordinary income tax on the fair market value (FMV) of the shares as they vest. If the company’s stock price grows substantially during that period, your taxable income — and tax bill — will grow with it.
• With an 83(b): You pay ordinary income tax on the FMV of the shares at the time of grant — often when the shares are worth very little. Future appreciation is then taxed as capital gains when you sell the shares.

In short: an 83(b) election lets you pay tax on “pennies” now instead of “dollars” later.

When You Can (and Should) File an 83(b)

The 83(b) election can only be made if:

1. The stock is subject to vesting or a substantial risk of forfeiture.
2. You file the election within 30 days of the grant or exercise date.
3. The stock is not yet fully vested when granted or purchased.

The election is most often used in these scenarios:

• Founders receiving restricted founder shares at incorporation or early-stage financing.
• Employees or executives receiving restricted stock as part of a compensation package.
• Option holders who early-exercise their stock options before vesting.

How the 83(b) Election Works: A Step-by-Step Example

Let’s walk through a simple example to illustrate the potential tax impact of an 83(b) election.

Scenario: Without an 83(b)

• You receive 100,000 shares of restricted stock at $0.10 per share.
• Vesting occurs over 4 years.
• At vesting, the FMV is $10 per share.

Here’s what happens:

• Each year, 25,000 shares vest.
• Each time shares vest, you owe ordinary income tax on the difference between FMV and what you paid.
• By the final vesting date, you’ve recognized $1 million in taxable income ($10 − $0.10 × 100,000 shares).
• Assuming a 37% tax rate, you owe $370,000 in taxes — possibly without selling any shares to cover it.

Scenario: With an 83(b)

• You file an 83(b) election within 30 days of the grant date.
• You elect to recognize income immediately, based on the FMV of $0.10 per share.

Now the outcome looks like this:

• Your taxable income is $10,000 (100,000 shares × $0.10 FMV).
• Assuming a 37% tax rate, you owe just $3,700 in tax — paid upfront.
• All future appreciation is treated as capital gains, potentially taxed at 15%–20% rather than 37%.

If the company is later acquired or goes public and the shares are worth $50 each, your gain is largely capital gain, not ordinary income. That difference alone could be worth hundreds of thousands — or even millions — in after-tax value.

The Advantages of a Well-Timed 83(b) Election

1. Tax Minimization

The primary benefit is clear: by paying tax on the initial, often negligible value of the stock, you dramatically reduce your ordinary income exposure. All future growth is taxed as capital gains — often at significantly lower rates.

2. Start the Capital Gains Clock Early

Capital gains treatment requires that shares be held for more than one year. By filing an 83(b) election at grant, you start the holding period immediately, even while the stock is vesting. This means you could qualify for long-term capital gains treatment much earlier.

3. Favorable Exit Planning

If the company goes public or is acquired, you’ll often want to sell quickly. Without an 83(b), you might be forced to hold shares longer to qualify for capital gains treatment. With one, you may already have met the holding period requirement — allowing you to sell with lower tax exposure immediately upon liquidity.

4. Simplified Tax Reporting

Without an 83(b), you’ll need to report income each time shares vest. With it, all reporting occurs once — at the time of election — and subsequent growth is capital gains. This simplifies record-keeping and tax filing.

Key Risks and Trade-Offs to Consider

While the 83(b) election offers significant upside, it’s not without risk. Understanding these risks is essential before filing.

1. Forfeiture Risk

If you leave the company before your shares vest, you could lose unvested shares — but you won’t get back the taxes you paid. That’s why 83(b) elections make the most sense when you expect to stay long term.

2. Liquidity Risk

You must pay tax upfront, even though you may not be able to sell shares to cover it. If cash is tight or the stock’s FMV is significant at grant, this could strain finances.

3. Company Risk

Startups fail — often. If the company doesn’t grow or goes out of business, your shares may be worthless, and you’ve paid tax on value that no longer exists.

4. Valuation Risk

An 83(b) election is most effective when the stock’s FMV is very low. If the valuation is already high, the upfront tax cost might outweigh the potential future savings. The decision becomes more complex in later-stage companies.

5. Administrative Risk: The 30-Day Rule

The election must be received by the IRS within 30 days of the grant or exercise date — no exceptions. Missing this deadline means losing the election forever for that grant. There is no way to retroactively file.

How to File an 83(b) Election: Step-by-Step

Filing an 83(b) election is straightforward, but precision and timing are critical. Here’s how to do it correctly:

1. Complete IRS Form 83(b)-1.

   • Include your name, address, Social Security number, company name, number of shares, FMV per share, and purchase price.

2. Mail the Form to the IRS Within 30 Days.

   • The 30-day window starts from the date of grant or exercise.
   • Use certified mail with a return receipt for proof.

3. Send a Copy to Your Employer.

   • This ensures proper payroll and withholding reporting.

4. Keep a Copy for Your Records.

   • Store it with your tax documents and share purchase agreements.

5. Attach a Copy to Your Tax Return (Optional but Recommended).

   • While not always required, this helps ensure the election is documented clearly.

Advanced Planning Strategies with 83(b)

For founders and executives, the 83(b) election is often most powerful when combined with broader tax and estate planning strategies.

1. Early Exercise + 83(b)

If your company allows early exercise of stock options (before vesting), you can purchase shares while the strike price is still low and file an 83(b). This approach can dramatically reduce future taxes — especially in high-growth startups.

Example:

• Exercise options at $0.01/share and file an 83(b).
• Shares grow to $50/share at IPO.
• Nearly all appreciation is capital gain.

2. Gifting Shares After 83(b)

Once you file an 83(b) and the stock begins to appreciate, gifting shares to family members, trusts, or charitable vehicles can shift future growth out of your taxable estate — a powerful wealth-transfer strategy.

3. Pair With QSBS Exclusion

For founders in early-stage C-corporations, filing an 83(b) early can help start the 5-year clock for Qualified Small Business Stock (QSBS) treatment, which can exclude up to $10 million of capital gains from federal taxes upon sale.

When an 83(b) Election Doesn’t Make Sense

While 83(b) elections are powerful, they’re not always the right choice. Consider skipping the election if:

• The company’s future is highly uncertain or you might leave soon.
• The FMV is already high and the upfront tax cost is significant.
• You’re not confident you can meet the tax payment without financial strain.
• The shares are unlikely to appreciate significantly before vesting.

In these cases, it may be better to pay tax as the shares vest — even if that means higher income tax exposure later.

Real-World Example: A Founder’s $5 Million Tax Win

Consider Emily, a co-founder who receives 2 million founder shares at $0.001 each. She files an 83(b) election immediately, paying income tax on $2,000 of value.

Ten years later, her company IPOs and the shares are worth $20 each. Her total gain: $39,998,000. Because of the 83(b) election:

• Nearly the entire gain qualifies as long-term capital gains.
• Her total tax bill is roughly $8 million (20% CG rate), instead of $14.8 million if she had paid ordinary income tax on vesting.
• She saves over $6 million in taxes.

Final Thoughts: Proactive Planning Pays Off

The 83(b) election is one of the most powerful tax strategies available to startup founders, early employees, and executives — but only if it’s used proactively and strategically. When done right, it allows you to:

• Lock in a low ordinary income tax bill early.
• Start the capital gains holding period immediately.
• Simplify future tax reporting.
• Potentially save millions of dollars in taxes over time.

But it’s not a decision to make lightly. Timing, company prospects, personal liquidity, and long-term plans all matter. Before filing, consult with a qualified tax advisor and ensure the election aligns with your broader equity, estate, and retirement strategy.

In the world of equity compensation, where fortunes can grow exponentially, the difference between filing and not filing an 83(b) election can literally be life-changing. The best time to plan is before the shares are worth much — and the smartest move you can make is to plan early, act decisively, and use the 83(b) election as a cornerstone of your wealth strategy.