If you’re a startup founder receiving stock that’s subject to vesting, you’ve likely heard the term “83(b) election.” But what is it, and why do early-stage founders, employees, and equity recipients need to act quickly and decisively around this election?
Making (or failing to make) an 83(b) election can significantly impact your tax liability—often determining whether you owe thousands in taxes down the line or save a substantial amount by acting early.
This guide walks founders through what the 83(b) election is, when it applies, how to file it, and why the 30-day window is absolutely critical.
What Is the 83(b) Election?
Section 83(b) of the Internal Revenue Code allows an individual who receives restricted stock (i.e., stock subject to vesting) to elect to be taxed on the value of the shares at the time of grant, rather than waiting until the shares vest.
The practical impact? You can potentially lock in a lower tax bill by paying taxes when the shares are worth very little (e.g., when your company is just starting out), rather than years later when your shares have (hopefully) appreciated significantly.
🔗 You can read the full text of the IRS regulations around Section 83(b) elections in this Federal Register Notice (2016).
When Does the 83(b) Election Apply?
The 83(b) election only applies if you are receiving stock that is subject to vesting—for example, a founder receiving common stock with a four-year vesting schedule.
If your stock is fully vested at the time of the grant, you don’t need (or qualify) to file an 83(b).
Common scenarios where 83(b) applies:
- Founders purchasing stock at incorporation subject to a standard vesting schedule
- Early employees granted restricted stock instead of options
- Advisors receiving equity tied to performance or time-based vesting
Why Should Founders File an 83(b) Election?
Filing an 83(b) election can lead to substantial tax savings. Here’s how:
Without 83(b):
- You pay ordinary income tax on the fair market value of your shares when they vest, which may be years later when the value is much higher.
With 83(b):
- You pay taxes on the current fair market value at the time of grant—which may be nominal (e.g., $0.0001/share).
By making the election, you convert future gains into capital gains, which are generally taxed at lower rates than ordinary income.
Example: Tax Treatment With and Without 83(b)
Scenario: You’re granted 1,000,000 shares at $0.0001/share with a 4-year vesting schedule.
- Without 83(b): You pay income tax each year as shares vest—at their then-current value. If shares are worth $1 at the end of year 4, you may owe income tax on $1,000,000.
- With 83(b): You pay income tax on $100 (1,000,000 x $0.0001) upfront. Future appreciation is taxed as capital gains only when you sell.
This is why most startup lawyers and advisors strongly encourage founders and early hires receiving restricted stock to file an 83(b) election immediately.
How to File an 83(b) Election (and When)
You must file an 83(b) election with the IRS within 30 days of the stock grant date (not the date the stock vests).
New IRS Form for 83(b) (Effective 2024)
As of late 2024, the IRS has released an official standardized form for Section 83(b) elections. Founders and employees must now use this updated form to comply with submission requirements.
🔗 You can find the new official Section 83(b) Election Form on the IRS website.
Here’s what to do:
- Complete the official IRS 83(b) election form — Use the new standardized form and confirm all grant details are correct.
- Mail the election to the IRS — Send via certified mail with return receipt. There is currently no e-filing option.
- Provide a copy to your employer — This ensures alignment with your equity records.
- Attach a copy to your tax return — Include the election in your federal income tax return for that year.
What Happens If You Miss the 30-Day Deadline?
There are no extensions or exceptions to the 30-day rule. If you miss the deadline:
- You can’t retroactively file
- You’ll be taxed on the fair market value of shares as they vest
For founders, this often means paying significant income taxes on paper gains—even if you haven’t sold any stock.
Founder Tip: Set a calendar alert for the 30-day window and use certified mail with return receipt to prove compliance.
Final Thoughts
The 83(b) election is one of the most important tax and equity planning tools for startup founders and early team members receiving restricted stock. When handled correctly, it can result in meaningful long-term tax savings and simpler cap table management.
At Veritas Global, we regularly guide founders, employees, and startups through cap table structuring, equity issuance, and compliance with IRS and securities regulations.
Need help filing an 83(b) or structuring your founder stock issuance? Contact us today to avoid costly tax mistakes and build a clean equity foundation.
📘 For related insights, read: Advisor Equity Grants: How to Structure Smart Equity for Startup Advisors
