Pros and Cons of Filing an 83(b) Election

The 83(b) election is a powerful tool, but it's not a one-size-fits-all solution. It's a strategic bet on your company's future success. By filing, you're choosing to accelerate your tax liability in exchange for a potentially massive tax break later on. But this choice carries real risks that need to be carefully weighed.

This page breaks down the core advantages and disadvantages in simple terms, helping you understand the trade-offs between paying taxes now versus later, the potential for capital gains treatment, and the pitfalls of forfeiture or company failure.

Key Takeaways

Pro: Locks in a low tax basis, allowing future growth to be taxed at favorable capital gains rates.
Con: Requires paying cash for taxes upfront on stock that is illiquid and may become worthless.
Pro: Starts the holding period for long-term capital gains and the crucial five-year clock for Qualified Small Business Stock (QSBS).
Con: The filing deadline is a strict 30 days, and the election is irrevocable once made.
Pro/Con: It simplifies your tax situation by handling the liability in one go, but can also trigger the Alternative Minimum Tax (AMT).

The Upside: Why Filing is Often a Smart Move

The primary motivation for filing an 83(b) election is the tax savings. When you file, you pay ordinary income tax on the fair market value of your shares at the grant date. For a very early-stage company, this value is often fractions of a penny per share, resulting in a minimal tax bill. From that day forward, any increase in the stock's value is considered a capital gain. If you hold the stock for more than a year after filing, that gain becomes a long-term capital gain, taxed at a significantly lower rate than ordinary income. This is the home run scenario for founders and early employees of successful startups, potentially saving them hundreds of thousands or even millions in taxes.

The Downside: The Risks Involved

The most significant con is the risk of forfeiture. You pay tax on stock you don't yet own. If you leave the company before your shares vest, you lose the stock and the money you paid in taxes. This risk is compounded by the fact that the company itself could fail, rendering your shares worthless. In either scenario, the IRS does not offer a refund for the taxes paid under an 83(b) election. You're also spending real cash today on a future, uncertain payoff. For those without significant savings, the upfront tax bill, even if small, can be a barrier.


graph LR
    subgraph Pros
        A[Tax Savings]
        B[Capital Gains Treatment]
        C[Starts QSBS Clock]
    end
    subgraph Cons
        D[Upfront Cash for Tax]
        E[Risk of Forfeiture]
        F[Company Failure Risk]
    end
    A --> B
    C --> B
    D --> E
    F --> E

Frequently Asked Questions

What are the main benefits of an 83(b) election?

The single greatest benefit is the potential for significant tax savings. By paying ordinary income tax on the stock's value when it's low, you convert all future appreciation into capital gains, which is taxed at a much lower rate. It also starts the clock for long-term capital gains and QSBS.

What risks should founders consider?

The biggest risk is the upfront tax payment on an illiquid asset. If the company fails or you forfeit your shares, you cannot recover the taxes paid. There's also the complexity of filing correctly within the 30-day deadline and potential Alternative Minimum Tax (AMT) implications.

How do pros/cons differ for employees?

For non-founder employees, the risk/reward calculation is similar but often involves a higher strike price or FMV, making the upfront tax bill more substantial. The decision may also be influenced by their personal financial situation and their confidence in the company's long-term prospects.

Get Personalized Help

This overview provides a general framework for thinking about the 83(b) election, but your personal financial situation and risk tolerance are unique. We strongly recommend consulting with a qualified tax professional to make the best decision for your circumstances.

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