Understanding 83(b) Elections: A Guide for Startup Founders
If you’re a startup founder, equity is likely a big part of your compensation - and potentially your wealth-building strategy. But there’s a crucial tax decision that many founders overlook early on - the 83(b) election. If you’ve been granted restricted stock, making this election could save you a lot in taxes down the road.
Let’s break down what an 83(b) election is, why it matters, and how to make the most of it - without the legalese.
What Is an 83(b) Election?
An 83(b) election is a request to the IRS that allows you to pay taxes on your stock grant upfront, at its current value, rather than when it vests (which is typically when it’s worth more). By locking in your tax liability early, you can avoid higher tax bills as your company grows.
Why Should You Care?
Let’s say you receive restricted stock worth $.0001 per share or effectively zero at the time of grant, which is the common fair market value of very early companies. If you don’t file an 83(b) election, you’ll owe income tax each time your stock vests - and if the stock price has increased to $10 per share by then, your tax bill will be much larger to reflect the $10 per share value.
But if you file an 83(b) election, you’re taxed on the initial $.0001 per share value, meaning you’ll pay much less in taxes (assuming the stock appreciates). When you later sell your shares, you’ll only pay capital gains tax on the growth.
When Does an 83(b) Election Make Sense?
Filing an 83(b) election is a smart move if:
Your stock is granted at a very low valuation (early-stage startups).
You expect your company’s value to increase significantly.
You can afford to pay the taxes upfront.
You’re confident you’ll stay at the company long enough to see your shares vest.
However, if your startup fails or your shares lose value, you won’t be able to get back the taxes you paid upfront.
Who Can and Can’t File an 83(b) Election?
An 83(b) election is only available to individuals who receive restricted stock as part of their compensation. Typically, this applies to:
Startup founders who receive stock at the time of incorporation or early-stage funding rounds. To learn more about fundraising visit our venture and financing page.
Employees granted restricted stock as part of an equity compensation package.
Advisors or contractors who receive restricted stock as compensation.
However, you cannot file an 83(b) election if:
You receive stock options (such as ISOs or NSOs) instead of restricted stock. The 83(b) election applies only to actual stock grants, not options that have yet to be exercised. See below section for an exception.
Your stock does not have a vesting schedule or restrictions. The election is specifically for stock that vests over time or is subject to forfeiture conditions.
You missed the 30-day deadline from the date of the stock grant. The IRS strictly enforces this rule, and no extensions are granted.
What About Stock Options? Can You Ever File an 83(b) Election?
While an 83(b) election does not apply to stock options themselves, there is an exception: if you exercise your stock options early (before they vest), you effectively receive restricted stock. In this case, you can file an 83(b) election to pay taxes on the stock at its current value instead of when it vests.
This strategy is often used by startup employees who receive incentive stock options (ISOs) or non-qualified stock options (NSOs) and want to reduce future tax burdens. However, not all companies allow early exercise of stock options, so you should check your stock option agreement and consult a tax professional before making a decision.
How to File an 83(b) Election
Timing is everything. You only have 30 days from the date of your stock grant to file - no exceptions. Here’s how:
Write a Letter to the IRS: There’s no official form, so you’ll need to draft a letter that includes:
Your name, address, and Social Security Number (or Taxpayer Identification Number).
A statement that you’re making an 83(b) election under Section 83 of the IRS Code.
A description of the stock, including number of shares and restrictions.
The date of the stock grant and its fair market value at that time.
The amount you paid for the stock (if anything).
A statement that you agree to include this amount in your taxable income.
Mail the Letter to the IRS: Send it via certified mail (so you have proof of submission) and keep a copy for your records.
Send a Copy to Your Employer: Your company may need this for its own tax records.
Keep a Copy for Yourself: If the IRS ever audits you, you’ll need proof that you filed on time.
The Bottom Line
If you’re an early-stage founder or employee receiving restricted stock, filing an 83(b) election can be a game-changer-but only if the circumstances are right. Before making a decision, talk to a tax professional who understands startup equity. Making the right move now could save you thousands (or even millions) down the line.
If you found this useful, share it with your co-founders-it’s a conversation worth having sooner rather than later.
This information is provided by Ebadat PLLC for educational and informational purposes only and is not intended, nor should it be construed, as legal advice or creating an attorney-client relationship. Our Notice and Terms of Use apply.
