83(b) Elections: When and How to File
An 83(b) election is one of the most important tax decisions a founder makes. File correctly and save potentially millions in taxes. Miss the deadline and there's no second chance. Here's everything you need to know.
What is an 83(b) Election?
When you receive restricted stock (stock subject to vesting), you don't normally pay tax until the stock vests. An 83(b) election lets you choose to pay tax on the stock at grant instead of at vesting. It's one of several key founder personal finance decisions that can save you significant money.
Why This Matters
Without 83(b): Tax is calculated when shares vest, at the value at that time. If your company grows, you pay tax on the appreciated value as ordinary income.
With 83(b): Tax is calculated at grant, typically when shares are worth almost nothing. All future appreciation is taxed as capital gains (much lower rate) when you sell. Combined with QSBS exclusions, this can result in zero federal tax on millions of dollars.
Example: The Math
| Scenario | Without 83(b) | With 83(b) |
|---|---|---|
| Grant date value | $10,000 | $10,000 |
| Value at full vest (4 years) | $5,000,000 | $5,000,000 |
| Ordinary income tax owed | ~$1.9M (on $5M) | ~$3,700 (on $10K) |
| Remaining gain treatment | Capital gains on sale | Capital gains on full appreciation |
The Risk
You pay tax now on stock you don't fully own yet. If you leave before vesting or the company fails, you've paid tax on worthless stock with no refund. For founders with minimal grant value, this risk is usually worth taking.
When to File
Critical Deadline: 30 Days
You must file an 83(b) election within 30 days of receiving restricted stock. This deadline cannot be extended. There are no exceptions. Miss it by one day and the election is invalid.
When 83(b) Makes Sense
When to Consider Skipping 83(b)
How to File
Filing an 83(b) is straightforward but must be done correctly. There's no official IRS form—it's a letter you write.
Filing Steps
Step 1: Prepare the Letter
Include: your name, SSN, address, property description, date received, fair market value at transfer, amount paid, and statement that you're making an 83(b) election. Your law firm should provide a template.
Step 2: Mail to IRS
Send via certified mail with return receipt to the IRS Service Center where you file your tax return. Keep the certified mail receipt as proof of timely filing.
Step 3: Give Copy to Company
Provide a copy of the election to your company. They need it for their records.
Step 4: Attach to Tax Return
Attach a copy of the election to your tax return for the year you received the stock (no longer technically required, but still recommended).
Proof of Filing
The certified mail receipt is your proof of timely filing. Keep it forever. Some founders also fax and email the IRS just to have additional records. Being paranoid about this deadline is appropriate.
Common Mistakes
Can You Undo an 83(b)?
No. Once filed, an 83(b) election cannot be revoked without IRS consent, which is rarely granted. Make sure you understand the implications before filing.
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