IRS 83(b) Election Explained | Startup Founders & Equity Tax Guide

IRS 83(b) Election Explained | Startup Founders & Equity Tax Guide

83(b) Election: A Smart Move When You Expect Your Equity to Grow

The 83(b) election gives you control over how and when you get taxed on restricted equity. Make it within 30 days of your grant—and shift future gains from ordinary income to the more favorable long-term capital gains bracket. That’s lower taxes, more growth, less regret.

Why it matters: File the 83(b) election early, and you lock in a low tax basis. Let your shares appreciate—with most of your gain taxed as capital gains, not income.

How It Works

  • By default, restricted stock is taxed as income when it vests. That value could be much higher.
  • With an 83(b), you pre-pay tax on today's value—often near zero for early-stage startups—within 30 days of grant.
  • Any increase from then on is taxed as long-term capital gain when you sell.

Scenario: With vs. Without an 83(b)

Imagine you’re granted 100,000 shares in a startup at $0.01 per share ($1,000 total).

  • Without 83(b): No tax at grant. At vesting, shares are worth $5 each = $500,000 taxable as ordinary income. Big tax bill upfront, before you even sell.
  • With 83(b): File within 30 days. Pay tax on $1,000 of income now (almost nothing). When you later sell at $5, your $499,000 gain is taxed at capital gains rates, saving you potentially hundreds of thousands in taxes.

Warning: If the company fails or stock value drops, you can’t get back the tax you prepaid.

Step-by-Step: Filing Your 83(b)

  1. Day 0: Equity granted; mark your calendar—30 days starts now.
  2. Prepare the form: Include your name, SSN, stock details, grant date, FMV, and amount paid.
  3. File on time: Mail to IRS (certified mail recommended). Send a copy to your employer. Attach another copy to your tax return.

FAQs

  • What happens if I miss the 30-day deadline?
    You lose the election. Taxes are deferred until vesting, likely at a much higher valuation.
  • Can I revoke an 83(b)?
    No. Once you file, it’s irrevocable.
  • What if I leave the company early?
    You may lose unvested shares, but you don’t get back any taxes you paid on them.
  • Do I need to attach proof when filing?
    Yes—keep copies of your form, certified mail receipt, and employer notice.

Who Should Consider It

  • Startup founders & early employees with low initial share value and potential upside.
  • Early-exercising option holders who can file within 30 days of exercise.

This article is for educational purposes only. Not legal or tax advice. Consult a tax advisor before making an 83(b) election.


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