83(b) Election

An IRS election that lets you pay taxes on equity at grant rather than at vesting — potentially saving significant taxes if the company's value grows.

An 83(b) election is a tax filing you can make within 30 days of receiving restricted stock or exercising unvested stock options early. Normally, equity subject to vesting is taxed as ordinary income at each vest date, based on the value at that time. The 83(b) election changes this: it instructs the IRS to recognize the full value of the equity at the time of grant and tax it then — at what is typically a much lower value. All future appreciation is then taxed as capital gains when you eventually sell, rather than as ordinary income as shares vest.

The 83(b) election is most powerful for founders and very early employees who receive equity when the company's 409A valuation is near zero. At $0.001 per share, the taxable income on 1 million shares is just $1,000 — a trivial tax bill. If the company exits at $10/share five years later, all $9.999 of appreciation per share is taxed at long-term capital gains rates rather than as ordinary income. The difference in tax rate — often 20–37 percentage points — on a large equity position can represent millions of dollars.

The downside risk is real: if the company fails and the stock is worthless, you've prepaid taxes on value that never materialized. Unlike a loss on publicly traded stock, restricted stock losses are generally capital losses, which are only deductible up to $3,000 per year against ordinary income. The decision requires a realistic assessment of the company's prospects, your confidence in the valuation at grant, and your personal tax situation — which is why consulting a CPA or tax attorney before the 30-day window closes is genuinely important, not just boilerplate advice.

Critical Rules

  • Must be filed within 30 days of the grant or early exercise — this deadline is absolute, there are no extensions.
  • Send via certified mail (return receipt requested) to your IRS service center and keep a signed copy for your records.
  • Also provide a copy to your employer — your company needs it for their records and W-2 reporting.
  • Only applies to property with a 'substantial risk of forfeiture' — i.e., unvested equity. Fully vested equity isn't eligible.
  • Not applicable to ISOs at grant (ISOs have their own tax regime), but may apply to early exercise of unvested ISOs or NSOs.
  • Consult a CPA or tax attorney before filing — the decision is irreversible and the stakes at successful companies are very high.

When the 83(b) Makes Sense (and When It Doesn't)

  • Strong case: you receive equity when the 409A valuation is very low (near zero), the company has genuine upside, and the tax cost today is minimal.
  • Strong case: you're a co-founder or seed-stage employee with a large grant and a long vesting schedule.
  • Weak case: the 409A is already high relative to your strike price — the upfront tax cost is significant and may not be worth the bet.
  • Weak case: you're not confident the company will succeed — you'd be paying taxes on equity that may never be worth anything.
  • The election is binary and irrevocable — once filed, you cannot undo it even if circumstances change.

Example

A co-founder receives 2 million shares of restricted stock at a $0.001/share 409A valuation — a total value of $2,000. She files an 83(b) election within the 30-day window and pays taxes on $2,000 of ordinary income. Five years later, the company sells for $8/share. Her $16 million gain ($16M minus $2K basis) is taxed at long-term capital gains rates. Without the 83(b), she would have owed ordinary income tax on shares as they vested at progressively higher values — potentially at the top marginal rate.