How 83(b) Elections Work: A Founder's Guide

An 83(b) election is a filing with the IRS that allows you to pay tax on restricted stock at the time of purchase — when it's worth almost nothing — rather than at vesting, when it could be worth millions. The filing must be made within 30 days of purchasing restricted stock. There are no extensions and no exceptions.

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Why the 83(b) Election Exists

When founders receive restricted stock (stock subject to vesting), the IRS treats each vesting event as a taxable event. Without an 83(b) election, you owe ordinary income tax on the fair market value of shares as they vest — not when you sell them.

For a startup that's growing in value, this creates a nightmare scenario: you owe taxes on paper gains you can't realize because there's no liquid market for your shares.

The 83(b) election lets you opt out of this default treatment by electing to be taxed on the full value of the stock at the time of purchase. Since founders typically purchase stock at incorporation for fractions of a penny per share, the tax at that point is effectively zero.

The Math: With vs. Without an 83(b)

Consider a founder who purchases 2,000,000 shares at $0.001/share with a standard 4-year vesting schedule:

With 83(b) Election

• Taxable amount at purchase: $2,000 (2M shares × $0.001)
• Tax owed: ~$0.60 at ordinary income rates
• At sale: All appreciation taxed at long-term capital gains rates (currently 20% federal max) if held for more than one year after purchase

Without 83(b) Election

• Year 1 cliff (25% vests): If the company is now valued at $2/share, you owe ordinary income tax on $1,000,000 (500K shares × $2)
• Years 2-4 (monthly vesting): Tax owed each month at the then-current fair market value
• At sale: Only appreciation above the vesting-date value qualifies for capital gains treatment

If the company reaches $10/share by the final vesting date, the total ordinary income recognized would be approximately $15-18M over the vesting period. At a 37% federal rate plus state taxes, that's potentially $6-7M in taxes — on shares you haven't sold and may not be able to sell.

The 83(b) converts what would be millions in ordinary income tax into long-term capital gains tax on the same appreciation. The rate difference alone (37% vs. 20%) is enormous, and the timing difference (at sale vs. at vesting) eliminates the cash flow crisis.

How to File an 83(b) Election

The process is straightforward but unforgiving:

Step 1: Prepare the Filing

The IRS provides an official form for 83(b) elections: Form 15620 (PDF). The form captures:

• Your name, address, and Social Security number
• A description of the property (number and class of shares)
• The date of transfer (when you purchased the stock)
• The fair market value at transfer
• The amount paid
• A statement that you're making the election under Section 83(b)

A note on the IRS online filing option: The IRS now supports electronic filing of 83(b) elections, but as of this writing, the online form does not support the extra decimal places common in startup stock pricing (e.g., $0.00001/share). Since most founder stock is priced at fractions of a penny, the online form is largely unusable for startup founders. We recommend filing by mail until this is resolved.

Step 2: Mail to the IRS Within 30 Days

Send the election to the IRS Service Center where you file your annual return. Use the IRS where-to-file lookup to find the correct address for your state. Use certified mail with return receipt requested so you have proof of timely filing. The 30-day clock starts on the date you purchase the restricted stock — not the date of incorporation, not the date the board approves the grant.

Step 3: Keep Your Records

• Keep a copy of the filed election
• Keep the certified mail receipt and return receipt
• Attach a copy to your federal tax return for that year

Step 4: Notify Your Company

Provide a copy to the company so they can update their records.

The 30-Day Deadline Is Absolute

This cannot be overstated: there is no way to file a late 83(b) election. The IRS has no extension process, no hardship exception, and no relief mechanism. If you miss the deadline by one day, you're subject to the default vesting-based taxation for the life of those shares.

Courts have consistently upheld the strict 30-day deadline, including cases where founders were unaware of the requirement or relied on counsel who failed to file.

Common Mistakes

1. Assuming Your Lawyer Filed It

Don't assume — confirm. Ask for a copy of the filed election and the certified mail receipt. We've seen multiple cases where an attorney "intended to file" but didn't, or where the filing was sent to the wrong IRS address.

2. Filing After the 30-Day Window

Some founders discover the 83(b) election months after purchasing stock. By then, it's too late. This is one reason why experienced startup counsel handles formation and equity issuance as a coordinated process — the 83(b) filing is built into the workflow from day one.

3. Not Filing for All Founders

Every founder receiving restricted stock needs their own 83(b) election. It's a per-person, per-grant filing. If you have three co-founders, that's three separate elections.

4. Forgetting About Early Employees

The 83(b) election isn't just for founders. Any employee or contractor who receives restricted stock (as opposed to stock options) should consider filing. The same logic applies — pay tax on pennies now rather than dollars later.

83(b) Elections and Stock Options

Important distinction: The 83(b) election applies to restricted stock, not to stock options. You cannot file an 83(b) on an option grant. However, if you early-exercise stock options (purchasing the shares before they vest), the resulting restricted stock is eligible for an 83(b) election.

Early exercise + 83(b) is a common strategy for early employees at startups, allowing them to start their long-term capital gains holding period and potentially qualify for QSBS benefits earlier.

The QSBS Connection

Filing an 83(b) election starts your holding period for Qualified Small Business Stock (QSBS) under Section 1202. If you hold the stock for more than 5 years and other requirements are met, you may exclude up to $10M (or 10x your cost basis, whichever is greater) in capital gains from federal tax entirely.

Without an 83(b), your QSBS holding period doesn't start until each vesting date — which could mean some of your shares don't qualify for the 5-year exclusion at exit.

Bottom Line

The 83(b) election is a one-page form that takes 10 minutes to prepare and costs a few dollars to mail. Missing it can cost hundreds of thousands or millions of dollars in unnecessary taxes. There is no good reason not to file it, and there is no remedy if you don't.

If you're incorporating a startup and issuing restricted founder stock, the 83(b) election should be filed the same week the stock is purchased. Not next month. Not when you get around to it. That week.

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Need help with your formation and 83(b) filings? Book a free call — we handle this as part of every Flux engagement.