Should I File an 83(b) Election?

Deciding whether to file an 83(b) election is one of the most critical, time-sensitive decisions a founder or early employee will make. When you receive stock that is subject to vesting (meaning you don't own it outright until you've worked for a certain period), the IRS gives you a choice: pay tax now on its current value, or pay tax later as it vests. The 83(b) election is your formal declaration to the IRS that you choose to pay now.

This guide will walk you through the core concepts, benefits, and risks to help you make an informed choice. Filing can lead to massive tax savings down the road, but it also comes with its own set of risks, including the possibility of paying tax on stock that ultimately becomes worthless.

Key Takeaways

• Pay Tax Now, Save Later: An 83(b) election lets you pay income tax on the Fair Market Value (FMV) of your stock at the time of grant, potentially saving you a fortune by taxing future growth at lower capital gains rates.
• 30-Day Deadline is Absolute: You have exactly 30 days from the date your stock is granted to file the election with the IRS. There are virtually no extensions.
• Irrevocable Decision: Once you file, you cannot take it back. If the company fails, you don't get a refund for the taxes you paid.
• Best for Low-Value, High-Growth Startups: The election is most powerful when the stock's current value is very low (e.g., $0.001 per share), minimizing your upfront tax cost.

The Benefits of Filing an 83(b) Election

The most significant advantage of an 83(b) election is the potential for enormous tax savings. By choosing to pay taxes on your stock's value when it's low, you lock in that cost. All future appreciation is then treated as a capital gain, which is taxed at a much lower rate than ordinary income.

• Lower Tax Rate on Future Gains: The difference between ordinary income tax rates (which can exceed 40% in some states) and long-term capital gains rates (typically 15-20%) can translate into tens of thousands, or even millions, of dollars in savings on a successful exit.
• Starts the Clock for Qualified Small Business Stock (QSBS): To qualify for the massive tax exclusion benefits of QSBS, you must hold the stock for at least five years. Filing an 83(b) election starts this five-year clock from the grant date, not the vesting date. Without the election, the clock might not start for years, putting the QSBS benefit at risk.
• Tax Simplicity: After filing, you don't have to worry about tracking vesting events for tax purposes each year. Your income event occurs once, at the beginning, simplifying your annual tax preparation significantly.

How an 83(b) Election Works

When a company grants you restricted stock, it's not fully yours until it vests. Normally, under Section 83 of the tax code, you would owe ordinary income tax on the value of the shares each time a portion vests. If the company's value is soaring, your tax bill could become enormous with each vesting date.

An 83(b) election changes the game. It tells the IRS you want to recognize all the income from your entire grant in the year it was granted. You pay tax on the total value of the shares based on the FMV on the grant date. The major benefit? Any appreciation in value from that point forward is treated as a capital gain, not ordinary income. Since long-term capital gains tax rates are significantly lower than ordinary income rates for most people, the savings can be substantial.

graph TD
    A[Stock Grant] --> B{File 83(b)?};
    B -->|Yes| C[Pay Tax on FMV at Grant Date];
    B -->|No| D[Pay Tax on FMV at Each Vesting Date];
    C --> E{Stock Value Increases};
    D --> E;
    E --> F[Sell Stock];
    C --> G((Future growth taxed at lower Capital Gains rate));
    D --> H((Future growth taxed at higher Ordinary Income rate));

The Risks of Filing an 83(b)

The primary risk is straightforward: you are paying tax on an asset that you don't fully own yet and that may end up being worthless. If you leave the company before your stock vests, you forfeit the shares, and the IRS will not refund the taxes you paid on them. Similarly, if the company fails, the stock becomes worthless, and again, the upfront tax payment is a sunk cost (though you may be able to claim a capital loss).

Additionally, the upfront tax payment can be a significant financial burden, especially if the stock has a meaningful valuation at the time of grant. You must have the cash on hand to pay the tax, which isn't always feasible for early-stage founders and employees.

Frequently Asked Questions

Get Personalized Help

Navigating tax decisions can be complex. The information here is for educational purposes only and does not constitute tax advice. For tailored advice that fits your specific situation, we recommend consulting with a qualified CPA.

→ Need tailored advice? Email taxhelp@example.com