cover letter for 83(b) election

Founder Advice

83(b) election — what is an irs 83(b) election and where to file.

If you’re a first-time founder, you may have never heard of a section 83(b) election before. I know the first time I heard about the 83(b) filing was when our corporate lawyers told us we had 30 days to sign and mail these important documents. Between printing, signing, and shipping, I spent 2 hours carefully putting together the required materials for myself and my co-founder (you’re welcome Collin! :)).

While tedious, an 83(b) election is important to ensure you don’t get hit with a hefty tax bill down the line. This election is especially important for all founders with a large percentage of equity. 

Given how much of a pain it was to handle the 83(b) election, and the number of questions we get asked at Stable from founders who have recently incorporated, we’ve written this article to break down the following questions so it’s easy to understand: 1. What is an IRS 83(b) election form? 

2. What are the 83(b) tax implications?

3. How to file and where to mail 83(b) election?

4. How to confirm the IRS received your 83(b) filing?

This post is aimed for founders and entrepreneurs. If you’re an employee, I’d recommend checking in with your accountant to see if this option makes sense for you because the tax implications may be more complicated.

What is an 83(b) election?

The 83(b) election gives founders the ability to pay taxes on the total fair market value of restricted stock on the date of its grant, instead of when it vests.

Okay, but what does that actually mean?

A Simple Example 

When you incorporate your company, you’ll likely issue shares for co-founders in the company. Many Delaware C-Corporations will initially issue 10 million shares with a very, very low share price. For instance, you may set a share price of $0.00001 per share at incorporation. Because the company has not generated any revenue or value yet, this share price is the lowest it’ll ever be, and founders get to reap the benefits of that.

For simplicity, If you have two co-founders who own fifty percent of the company each (in actuality, you may set aside some shares in an option pool for employees and advisors, but we’re not going to get into that), this will mean the stock is worth $50 (5,000,000 shares x $0.00001). 

So, $50 becomes the “total fair market value of restricted stock on the date of its grant” and the date of the grant is the incorporation date or soon after. As a founder, you’ll “pay” $50 to the company for these shares and likely be put on a 4 year vesting schedule .

What are the 83(b) tax implications?

Now that we’ve established that you own $50 of your company valued at $100, let’s jump into how this can affect your taxes over time. First, you probably incorporated your company to generate revenue and build a meaningful business. Whether you’re aiming for your company to be worth $1 million or $1 billion dollars one day, the value of your company will affect the share price.

Let’s say your company is in fact a unicorn (yay!) one day. At a $1 billion dollar valuation, and again for simplicity assuming no additional issued shares, dilution, or additional shareholders, those shares you once paid $50 for are now worth $500 million! Woo, you’re rich! 

Not so fast though, there are tax implications on that earning. 

In short, receiving restricted stock requires the founder to pay the value of the stock on their individual income tax. Filing an 83(b) election enables you to pay that tax liability upfront for all shares . Otherwise you will need to pay income tax on the value as it vests every year, which is also complicated to keep track of.   

Additionally, when you liquidate your shares, you will pay a capital gains tax on the earnings. This is usually less than how much your individual income tax will be, especially if it is a large amount.

Let’s look at what could happen in both scenarios:

Filed 83(b) election

• Pay income tax on the $50 (10-37%, depending on your income bracket)
• Pay capital gains tax of 20% on $499,999,950 ($50M minus the $50 you already paid as part of your income taxes)
• Therefore, you may pay an income tax of $18.50 (or ($50*0.37) † ) and capital gains tax of $99,999,990 (or $499,999,950*0.20)... which is a total of $100,000,008 in taxes

$100M is a lot of money but now let’s look at what happens if you didn’t file an 83(b) election.

Did not file 83(b) election

• Pay income tax on the $500 million as it vests (10-37%, depending on your income bracket)
• Pay capital gains tax of 20% on the difference of what you paid on the vested value and $500 million
• For this model, let’s assume when the shares vested, the shares were worth $250M 
• The vested value is how much the stock was worth at the date vesting occurred, and in a way the immediate value of the stock
• In actuality, the value will likely be variable over time due to how shares vest
• Therefore, you may pay an income tax of $92.5M (or ($250,000,0000.37) † ) and capital gains tax of $50M ($250,000,000 *0.20)... which is a total of $142,500,000 in taxes

In this simplified scenario, you would save over 42 million if you had filed the 83(b) election form. Seems like a pretty good deal for only filling out a form and sending it in, eh?

In short, because capital gains tax rate is lower than income tax rate for high sums of money, this gives you a tax advantage to categorize the majority of the earnings as capital gains, instead of income.

† Note that the actual income tax would be very slightly less since you can take advantage of lower tax brackets up to ~$500K in earnings. But again, because we’re riding on simplicity and will likely have other income, we’re assuming the highest income bracket.

How to file and where to mail 83(b) election?

Now that you understand what an 83(b) election is, there are specific steps to take to file your 83(b) election and obtain proof of filing in the case that you’re ever audited by the IRS down the line. 

Reminder: you have 30 days to file from the date of your stock grant to file this form

The steps for how to and where to mail 83(b) election are outlined below:

Step 1: Sign the required documents

First, you’ll need to sign the 83(b) election form typically attached to your Stock

Purchase Agreement. Your law firm or incorporation service should have generated this document for you as part of issuing stock. If not, you can use this template from the IRS .

If you signed using a wet signature, you’ll also want to scan a copy of the document for your records.

Step 2: Prepare a cover letter for the IRS

You’ll need to create a cover letter that contains the following information to send with the filing: 

• Name and SSN of spouse (if applicable)

Note : Your law firm or incorporation service may provide this for you.

Step 3: Print the required documents

Print or photocopy the signed 83(b) election form and the cover letter. In total, you should have at least two copies of your 83(b) election form. 

Step 4: Prepare the mailing

In a large envelope, prepare the following documents for mailing:

• Original copy of the signed 83(b) election
• Photocopy of the signed 83(b) election
• IRS cover letter
• Self-addressed and stamped envelope (see below section on how the IRS will confirm reception by mailing a stamped copy back to you)

Step 5: Mail the filing

Go to your local Post Office to mail the filing. You should mail your 83(b) election filing to the same address that you would mail your tax returns to. Depending on your state, the address may differ:

Our law firm recommends sending the 83(b) election through USPS Certified Mail in order to receive a green mailing receipt once you mail the documents. This green mailing receipt can be retained as proof that you’ve made the filing. 

How to confirm the IRS received 83(b)?

When mailing in your 83(b) election, you should include a self-addressed and stamped envelope so that the IRS can mail a copy back to you. In your cover letter, you should include instructions similar to the following:

Please acknowledge receipt of the enclosed 83(b) election form by date-stamping the two additional copies enclosed of this election and returning them in the envelope provided.

By providing the additional copies of your 83(b) election, including a return envelope with postage, and clearly outlining instructions, the IRS will send back a copy of your 83(b) election in the mail to the specified address. When received, you should scan a copy of it for your records. 

If you need a US address to receive the returned 83(b) election from the IRS, you can use a virtual mailbox service like Stable (50% off discount for newly incorporated businesses). With a virtual mailbox, you’ll be notified when you receive the copy of the 83(b) filing and a copy of this filing will be digitally and securely stored. 

Overall, the 83(b) election can be a pain to file, but it is worth the tax benefits for a founder. Being able to take advantage of a lower tax rate for the majority of your earnings can add up in the event of an acquisition or IPO. 

These are detailed instructions to follow on how to compliantly file your 83(b) election — and remember, if you’re looking to have a safe place to receive and digitize the returned 83(b) election from the IRS, you can use a virtual mailbox service like Stable (50% off discount for newly incorporated businesses). 

At Stable , we provide permanent virtual addresses and mailboxes so you never have to worry about mail or changing addresses again. We’ll digitize all mail that you receive here, and you’ll be able to scan, forward, shred, (and even deposit checks!) from anywhere in the world.

Get started with Stable here if you’d like a virtual business address + mailbox in less than 3 minutes. 

Disclaimer: Stable is not a legal or accounting firm, therefore we cannot provide legal or tax advice. You should consult legal and tax professionals for advice on how to meet ongoing obligations that apply to you and your company.

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Filling an 83(b) Election: A Step-by-Step Guide

Filing an 83(b) election is a critical process for employees who receive restricted stock as part of their compensation. This election allows you to pay taxes on the total fair market value of the stock at the time of granting rather than at the time of vesting, potentially leading to significant tax savings. In scenarios involving valuation caps , understanding the fair market value at the time of the grant is essential, as it directly impacts the potential tax benefits. Here's a detailed, step-by-step guide on how to file an 83(b) election, including necessary documentation and IRS submission guidelines.

Step 1: Understand the Requirements

Before filing an 83(b) election, it's essential to understand the specific requirements and implications:

• Eligibility: You must receive restricted stock, not stock options or other types of equity compensation.
• Timing: The election must be filed within 30 days of receiving the stock.
• Tax Implications: You will pay income tax on the fair market value of the stock at the time of the grant, which could be beneficial if the stock's value increases significantly over time.

Step 2: Obtain the Necessary Forms

To file an 83(b) election, you will need the following documents:

• 83(b) Election Statement: This is a formal letter to the IRS stating your intention to make the election.
• Cover Letter: While not required, a cover letter can provide additional context and ensure your election is processed correctly.
• IRS Form 2848 (Power of Attorney and Declaration of Representative), if someone is filing on your behalf.

Step 3: Complete the 83(b) Election Statement

The 83(b) election statement must include specific information:

• Taxpayer's Name, Address, and Social Security Number
• Description of the Property: Detail the type and number of shares received.
• Date of the Grant: Indicate the date you received the stock.
• Fair Market Value: State the fair market value of the stock at the time of the grant.
• Amount Paid: Specify the amount paid for the stock, if any.
• Declaration: Include a statement declaring your intention to make the election under Section 83(b).

Step 4: Submit the 83(b) Election to the IRS

The completed 83(b) election statement must be submitted to the IRS within 30 days of the stock grant. Here’s how to submit it:

• Mailing: Send the original statement to the IRS service center where you file your tax return.
• Certified Mail: It's advisable to use certified mail with a return receipt requested to ensure the IRS receives your statement

Step 5: Provide a Copy to Your Employer

You must also provide a copy of the 83(b) election statement to your employer. This step is crucial because your employer needs to be aware of your election for their tax reporting purposes.

Step 6: Attach a Copy to Your Tax Return

When you file your income tax return for the year, attach a copy of the 83(b) election statement to your return. This ensures that the election is documented in your tax records.

Step 7: Retain Copies for Your Records

Keep copies of all documents for your personal records, including:

• The original 83(b) election statement.
• The IRS-certified mailing receipt.
• Copies provided to your employer.
• The copy is attached to your tax return.

Key Considerations and Risks

While the 83(b) election can provide significant tax advantages, it’s essential to consider the risks:

• Non-Refundable Taxes: If the stock value decreases after the election, the taxes paid on the initial value are not refundable.
• Employment Stability: If you leave the company before the stock vests, you may not realize the expected benefits.
• Company Performance: The election is beneficial if the company performs well and the stock value increases significantly.

Strategic Decision-Making

The decision to make an 83(b) election should be made with a clear understanding of your financial situation, the company's potential for growth, and the associated risks. Consulting with financial advisors and tax professionals can provide personalized insights and help you make the best decision for your circumstances.

Filing an 83(b) election is a strategic financial decision that can lead to substantial tax savings, but it requires careful consideration and timely action. By following these detailed steps and understanding the necessary documentation and submission guidelines, you can navigate the process effectively. If you have any doubts or need personalized advice, consult with a financial advisor or tax professional to ensure you make the best decision for your financial situation.

Dan Gertrudes

As CEO and Founder of GrowthLab Finance-as-a-Service (FaaS), Dan is the vision behind GrowthLab’s success. After spending 15 years at Fortune 500 and medium-sized companies, Dan transferred his knowledge into building GrowthLab, which now supports over 400 scaling businesses throughout their entire finance and HR value stream.

Frequently Asked Questions About 83b Elections

What is an 83(b) election.

An 83(b) election is a tax decision allowing employees to pay taxes on the fair market value of restricted stock at the time of granting rather than at the time of vesting.

Who is eligible to file an 83(b) election?

Employees who receive restricted stock as part of their compensation package are eligible to file an 83(b) election.

What are the benefits of making an 83(b) election?

Benefits include immediate tax savings, capital gains treatment on future appreciation, and simpler tax planning.

What is the deadline for filing an 83(b) election?

The 83(b) election must be filed within 30 days of the stock grant date.

How do I file an 83(b) election with the IRS?

Complete the 83(b) election statement, mail it to the IRS service center where you file your tax return, provide a copy to your employer, and attach a copy to your tax return.

What information must be included in the 83(b) election statement?

The statement should include your name, address, Social Security number, a description of the stock, the grant date, the fair market value at the time of the grant, the amount paid, and a declaration of your election under Section 83(b).

What are the risks of making an 83(b) election?

Risks include non-refundable taxes if the stock value decreases, potential loss if you leave the company before the stock vests, and dependency on company performance.

Should I consult a financial advisor before filing an 83(b) election?

Yes, consulting with a financial advisor or tax professional can provide personalized insights and help you make an informed decision.

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Section 83(b) Election: Tax Benefits and How to File

A Section 83(b) Election is a provision in the Internal Revenue Code that allows taxpayers who receive restricted stock or other property subject to vesting, such as stock options or restricted stock units, to elect and include the fair market value (FMV) of the property at the time it was granted as taxable income in the year of receipt. The election allows taxpayers who receive equity compensation to pay taxes on the fair market value (FMV) at the time of granting, rather than at the time of stock vesting. The election can potentially have massive tax benefits and savings, since it allows taxpayers to pre-pay taxes on equity compensation on a low valuation.  

By recognizing income earlier at the time of granting, taxpayers can pre-pay a lower tax bill on the equity compensation, assuming the equity value increases in future years.  

Qualifications and Suitability for Section 83(b) Elections 

Section 83(b) elections are commonly made by founders of startups , and early-stage employees of these startups since they are typically compensated via restricted stock units. These awards are typically issued at a nominal value, such as $.001 per share. If taxpayers who receive these awards made an 83(b) election, they would pay ordinary income tax on the $.001 per share nominal value, resulting in a very minimal tax bill. The taxes paid up-front would become the taxpayer’s cost basis in the shares, and the taxpayer would be subject to a capital gains tax on the FMV if the shares are sold later.   

Common Examples of Equity Compensations that Taxpayers Can File an 83(b) Election For 

There are various other types of equity compensations that taxpayers can file an 83(b) election for. These all have different tax implications, but if an 83(b) election is made, it can potentially save taxpayer’s a significant amount of money, since the election instructs the IRS to tax the equity compensation when it is granted at a lower fair market value, instead of waiting until it vests, when the value is expected to increase over time. 

Below are some common examples of equity compensations that taxpayers can file an 83(b) election for:  

• Incentive Stock Options (ISO) 
• Non-Qualified Stock Options (NSO) 
• Restricted Stock Awards (RSA)  
• Profits Interest Units (PIU)  

How to Submit a Section 83(b) Election 

Section 83(b) elections must be submitted to the IRS within 30 days after issuance of the equity compensation. In addition, taxpayers who receive such compensation and want to file an 83(b) election must also submit a copy of the completed and signed election form to their employer. It is also common to include a cover letter for the IRS, though it is not a requirement. There is a lot of information you will need to provide on the election form, such as name, address, social security number, type of shares, number of shares, FMV on the date of grant or purchase etc. However, the general template of the election forms is consistent for 83(b) Elections.  

Evolved has provided two templates of Section 83(b) Elections– one for an incentive unit grant, or a profits interest unit grant, and one for a common stock grant. These can be found at the end of this article. 

>> Jump to 83(b) Election Template for Incentive Unit Grant / Profits Interest Grant  

>> Jump to 83(b) Election Template for Common Stock Grant  

Conclusion  

Section 83(b) elections can have massive tax savings implications for taxpayers who receive some sort of equity compensation. By making the election, individuals can lock in the tax liability at the time of receipt, when the award’s value is lower and is expected to increase over time.  

However, there are some risks and considerations. If the property decreases in value or does not vest, the individual won’t get a tax deduction for the amount included in income. It is also important to consult an experienced tax advisor or financial planner to ensure that the election aligns with one’s overall financial goals and circumstances.  

Evolved is a tax compliance and advisory firm with offices in New York City, Philadelphia and Stamford, serving clients nationally throughout the US.  We provide tax provision, private equity and venture capital services alongside advisory for high net-worth tax and family office tax. 

83(b) ELECTION TEMPLATE  

Date:   

CERTIFIED MAIL NUMBER _________________________  

RETURN SERVICE REQUESTED  

Department of the Treasury  

Internal Revenue Service  

Ogden, UT 84201-0002 1    

Re: Election Under Section 83(b) of the Internal Revenue Code  

Dear Sir or Madam:  

Enclosed please find an executed form of election under Section 83(b) of the Internal Revenue Code of 1986, as amended, filed with respect to an interest in [COMPANY NAME].  

Also enclosed is a copy of this letter and a stamped, self-addressed envelope.  Please acknowledge receipt of these materials by marking the copy when received and returning it to the undersigned.  

Thank you very much for your assistance.  

Very truly yours,   

Signature  

Taxpayer Full Name  

Enclosures    

PROTECTIVE ELECTION TO INCLUDE MEMBERSHIP INTEREST IN GROSS INCOME PURSUANT TO SECTION 83(b) OF THE  

INTERNAL REVENUE CODE  

On [DATE] , the undersigned executed an incentive unit grant agreement (the “Unit Grant Agreement”) pursuant to which equity interests (the “Incentive Units”) in [COMPANY NAME] (the “Company”) were issued in connection with the provision of services by the undersigned to or for the benefit of the Company or its affiliates. Pursuant to the Unit Grant Agreement and the Limited Liability Company Agreement of the Company, dated as of [DATE] (the “LLC Agreement”), the holder of the Incentive Units is entitled to an interest in Company capital exactly equal to the amount paid or to be paid therefor and an interest in Company profits, and so the Incentive Units qualify as “profits interests” within the meaning of Revenue Procedure 93-27 as of the date that the Incentive Units are issued. If the relationship under the Unit Grant Agreement ceases, then under certain circumstances the amount that the holder of the Incentive Units will be entitled to receive as a result of a disposition of the Incentive Units may be less than the fair market value thereof. Hence, the Incentive Units are subject to a substantial risk of forfeiture.  

Based on Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), the Treasury Regulations promulgated thereunder, Treasury Regulation §1.721-1(b), Proposed Treasury Regulation §1.721-1(b)(1) and Revenue Procedures 93-27 and 2001-43, the undersigned believes that neither the undersigned’s execution of the Unit Grant Agreement nor the issuance of the Incentive Units pursuant thereto is subject to the provisions of Section 83 of the Code. In the event that execution of the Unit Grant Agreement or issuance of the Incentive Units is so treated, however, the undersigned desires to have such execution or issuance taxed under the provisions of Section 83(b) of the Code at the time the undersigned executed the Unit Grant Agreement, and the Incentive Units were issued.  

Therefore, pursuant to Section 83(b) of the Code and Treasury Regulation §1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Incentive Units, to report as taxable income for the calendar year 2021 the excess (if any) of the value of the Incentive Units on [DATE] over the purchase price thereof.  

The following information is supplied in accordance with Treasury Regulation §1.83-2(e):  

• The name, taxpayer identification number, address of the undersigned, and the taxable year for which this election is being made are:

TAXPAYER’S NAME: _______________________  

TAXPAYER’S SOCIAL SECURITY NUMBER: _____________________  

ADDRESS: _________________________________________________  

TAXABLE YEAR:  ____________________________________________  

• A description of the property with respect to which the election is being made: The Incentive Units, including any rights therein that the holder of such units acquired upon the execution of the Unit Grant Agreement and the LLC Agreement.
• The property was transferred to the undersigned on [DATE]
• The property is subject to the following restrictions: If the service relationship between the undersigned and the Company and its affiliates ends, then under certain circumstances the amount that the holder of the Incentive Units will be entitled to receive as a result of a disposition of the Incentive Units may be less than the fair market value thereof.
• The fair market value of the property with respect to which the election is being made, determined without regard to any lapse restrictions and in accordance with Revenue Procedure 93-27, on the date such property is transferred: [AMOUNT]
• The amount paid for such property: [AMOUNT]

The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his or her income tax return for the taxable year in which the property is transferred.  The undersigned is the person performing the services in connection with which the property was transferred.  

Dated: ____________________  

 _________________________

[Taxpayer Signature]

ELECTION UNDER SECTION 83(b) OF THE  

INTERNAL REVENUE CODE OF 1986, AS AMENDED    

The undersigned taxpayer hereby elects, pursuant to § 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income as compensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares.  

TAXPAYER’S NAME: ____________________________________________________  

TAXPAYER’S SOCIAL SECURITY NUMBER: _________________________________    

ADDRESS: ____________________________________________________________     

TAXABLE YEAR:  Calendar Year 20____   

• The property which is the subject of this election is ____________________ shares of common stock of _______________________________________________________.
• The property was transferred to the undersigned on [DATE].
• The property is subject to the following restrictions: [Describe applicable restrictions here.]
• The fair market value of the property at the time of transfer (determined without regard to any restriction other than a nonlapse restriction as defined in § 1.83- 3(h) of the Income Tax Regulations) is: $__________________ per share x ____________________ shares = $_____________________.
• For the property transferred, the undersigned paid $_________________ per share x _______________________ shares = $_______________________
• The amount to include in gross income is $___________________. [The result of the amount reported in Item 5 minus the amount reported in Item 6.]

The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his or her income tax return for the taxable year in which the property is transferred.  The undersigned is the person performing the services in connection with which the property was transferred.    

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How to File an 83(b)

When I joined Shoobx as a very early employee I received an option grant, “Welcome aboard!” Because the company wants its employees to benefit from the potential tax advantages it offers, Shoobx permits early exercise of options. This means I was able to exercise all of my shares when I started—before they had actually vested. At that point, my new colleagues clued me into the fact that I would likely want to file an 83(b) election with the IRS, “Just do it, Jen,” and encouraged me to do so in a timely fashion, “You only have 30 days, don’t %!&@# it up.”

In simple terms, an 83(b) election is a letter you send to your friends at the IRS letting them know you’d like to be taxed now on your equity. 83(b) is named for the relevant section of the Internal Revenue Code. Check out our blog post, The Buzz about 83(b) , to learn more, including the possible tax implications.

Based on some helpful guidance, I decided that an 83(b) election was the right choice for me and here are the exact steps I followed to file it:

• Purchase the shares. I signed the paperwork and handed over a check for the purchase amount. With that my 30-day filing clock started ticking.
• Fill out a cover letter and election form. I added my information to the standard cover letter to the IRS and completed the 83(b) election form . (If you are lucky enough to be a Shoobx user, this is super easy because Shoobx has templates and will create these documents for you.)
• Cover letter
• 83(b) election form
• Second copy of the 83(b) election form
• Self-addressed stamped envelope

I addressed the envelope to the IRS using the address where I would mail my personal tax return if I were not making a payment. (This varies by state of residence and can be found on the IRS website . Click on your state, then look for where you would mail a 1040 without a payment.)

• Wait an indeterminate period of time. It took a few weeks for me to get my stamped copy back from the IRS. (Based on the anecdotal evidence of my co-workers, the amount of time you wait is highly variable.)
• Give a copy to the company. I made a copy of the stamped 83(b) election and gave it to my employer. I also kept a copy for my personal records. (If you are a Shoobx user, Shoobx will safely store your 83(b) election form for you.)

That’s what I did. If you decide an 83(b) election is right for you, I hope you’ll find this helpful. But remember: the IRS is always the definitive expert on the IRS—and the rules may change from year to year (like whether you have to include a copy with your tax return or not)—so check with them if you have any questions.

Need a platform that helps you manage all of your documentation ? You're in the right place. 

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How to File an 83(b) Election for Restricted Stock Grants

March 25, 2021 | Stock Options | Investing | Financial Planning | Pre-IPO

What is an 83(b) election?

An 83(b) election is a way to potentially limit your tax liability for gains on shares of company stock. It allows you to pay taxes on shares before they vest, when their value may be still relatively low. You may choose to file an 83(b) election when you receive shares of restricted stock or purchase shares through early exercise of stock options. When an 83(b) election is filed, the stock is taxed at its current value on the date of grant rather than at the time it vests.

How can an 83(b) election affect your taxable income?

An 83(b) election isn’t guaranteed to save on your tax bill. If a company does well, it’s stock is generally expected to increase in value over time. If a pre-IPO shareholder in such a company files an 83(b) election, their taxable income would be lower than they would if their shares were taxed later. On the other hand, a company’s stock could decrease in value (or the company could go under altogether). In this case, paying taxes early on unvested shares would mean paying taxes on a higher income than if tax liability were calculated later. Because of this risk, it’s important to consult with a trusted investment advisor before deciding whether to file an 83(b) election.

How does an 83(b) election affect holding periods?

In addition to making your unvested shares taxable at their current value, filing of an 83(b) election starts the clock for important holding periods. To qualify for long-term capital gains treatment of gains from stock sales, you must first hold the stock for at least one year. Gains from the sale of shares that are held for less than one year are treated as regular income, which generally carries a higher tax rate. When you make an 83(b) election, that one-year holding period begins immediately.

If your shares are qualified small business stock (QSBS), holding these for at least five years before selling can make the gains exempt from federal taxes. Filing an 83(b) election starts the clock on this holding period, as well. If you do not file an 83(b), then these holding periods begin at the time your shares vest.

What is the procedure for filing an 83(b) election?

File within 30 days of receiving restricted shares. .

After you receive restricted shares, you have 30 days to make an 83(b) election by sending a completed form and cover letter to the IRS. You can use the 83(b) election form that the IRS provides here on page 9, the sample cover letter and 83(b) form provided by the SEC here, or similar forms provided by your attorney or investment advisor.

Sign and mail copies of the completed forms to both the IRS and your employer.

Make at least four copies of the completed 83(b) election form and cover letter. Send two copies of your documents to the IRS via certified mail with return receipt along with a postage-paid self-addressed envelope. Use the same IRS address that you use to file your taxes . The filing is considered complete on the postmark date. You’re not legally required to submit a second copy and return envelope, but if you do, the IRS will stamp one of them and send it back to you. Mail a third copy of the documents to your employer, and keep another for your records.

Check your local tax laws.

In some jurisdictions, state or local tax authorities must also receive copies of an 83(b) filing. Check with your local tax professional about the requirements of your state tax laws.

Should I make an 83(b) election?

An 83(b) election has the potential to make an immense difference in the amount of tax you pay on your company stock. If you currently have restricted stock that is eligible for early exercise, speak with a financial professional who is experienced in the IPO process to evaluate whether filing an 83(b) is in your best interest. To learn more about company stock and the IPO process, see WRP’s Insights .

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A Guide to Section 83(b) Election for Startup Founders

For startup founders, Section 83(b) elections are certainly a topic of interest. Business founders have likely heard they should file an 83(b) election, but what exactly is this, when should you file it, and is it mandatory? We’re here to demystify the details of the 83(b) election, including how it’s filed and the process of filing.

What is an 83(b) Election?

An 83(b) election is a provision under the internal revenue code or IRC. It is filed to indicate that an elector would like their equity, typically shares of restricted stock, to be taxed at the time it is granted at its fair market value. Under 83(b) elections, the value of the entire stock is included in an individual’s gross income in the year of receipt.

The election gives startup founders and employees the option to pay taxes on their options, before they vest. It’s called an election because founders are electing, or choosing, to pay taxes early.

When do you use an 83(b) election?

For startup founders and early stage employees of the startup, it makes sense to complete an 83(b) election upon receipt of unvested shares. That is when the stock value is generally low, so the taxes will not be high.

How long do you have to make an 83(b) election?

An 83(b) election must be filed with the IRS within 30 days of the exercise. The election has to be made upon receipt of the actual shares of the stock, and not the option. Exercise first, election next. If eligible individuals receive an early exercisable stock option, the 83(b) election can be made upon receipt of the exercised shares.

What if you forget to fill out an 83(b) election?

If individuals do not meet the 30-day deadline for an 83(b) election, though limited, there may still be options. However, it is important to know, there is no way to extend that time period.

For new startups, consider cancelling the old stock grant and issuing a new one, or creating a new grant with a different vesting schedule or number of shares. It’s also possible to amend a stock grant so that the repurchase price is at fair market value.

Most commonly, the employee must recognize the stock value as income as they satisfy the vesting conditions. Unfortunately, this often happens at a time when it has appreciated in which the amount of taxable income has also increased along with it.

It is important to seek financial and legal advice before proceeding with these options.

Are 83(b)s required if you have no vesting?

Elections do not apply to vested shares, only to stock that is not yet vested. Any stock that is not early exercisable will not qualify for 83(b).

According to the IRS, if vesting restrictions are imposed on previously purchased fully vested stock, stock is treated like it was purchased at the time of original purchase. Anything that is taxable as income is measured at the time of the original purchase of shares, so there is no need to file an election.

If you are the sole founder/equity holder, you should only file an 83(b) election if the equity is subject to vesting. You do not need to make an 83(b) election when there are no restrictions on your ability to dispose of the stock. If for some reason the shares are subject to vesting, you should then consider filing an election. 

How is a section 83(b) election made?

An 83(b) election is made through filing with the IRS. Make three copies of the signed and completed election form and one copy of the IRS cover letter. You will send the original form and letter, a copy of the cover letter, and a self-addressed stamped envelope to the IRS. The center to send it to is the one where you would normally file your tax return. Sending the paperwork via certified mail is highly recommended. Deliver a copy of the election form to the company. You may need to attach another copy to your income tax returns depending on your location. Keep another copy for your own records.

Who Uses an 83(b) Election?

Who files an 83(b) election.

The person who receives restricted stock in compensation for their work, in other words the taxpayer, is the one who files the 83(b) election for themselves. 

Should founders file an 83(b) election?

In most cases it’s a good idea for startup founders to make an 83(b) election. The stock value is usually low at the time it is purchased, which offers the potential for tax savings in the long-run.

Can a partnership make an 83(b) election?

Each taxpayer must complete his or her own 83(b) election.

Does a preferred stock investor need to file an 83(b) election?

For a preferred stock investor, the situation is generally different. Preferred stock typically comes with predetermined dividends and doesn’t have the same vesting requirements as restricted stock or stock options given to employees. Since preferred stock usually isn’t subject to the same type of vesting schedule—where ownership rights are contingent on continued employment or meeting performance milestones—the conditions under which an 83(b) election is relevant don’t usually apply.

In essence, since preferred stock is often fully owned at the time of purchase and isn’t earned based on service or performance criteria, there’s no need to make an 83(b) election. This election is primarily for situations with a risk of forfeiture associated with vesting conditions, which isn’t typically a concern for preferred stock investors. Therefore, preferred stock investors generally do not need to file an 83(b) election.

Can you use online tax platforms to file an 83(b) election?

Many online tax platforms may not directly facilitate the filing of an 83(b) election because it’s a separate process from filing your annual tax returns. However, some platforms may provide guidance or templates for drafting your 83(b) election letter.

What Should You Consider Before Doing an 83(b) Election?

What are the benefits of an 83(b) election.

Filing an 83(b) election allows people to pay taxes now, in hopes that a company will be successful and stock value will appreciate. If that happens, tax liability is much more manageable, saving lots of money. Instead of being taxed at the ordinary income tax rate, any additional gain will be taxed at the lower long-term capital gains rate.

What are the risks of an 83(b) election?

The biggest risk is that share value may not appreciate, or may even depreciate. In the case of depreciation, because taxes are prepaid on a higher valuation of equity, individuals will have unnecessarily overpaid in taxes . This overpayment of taxes cannot be claimed.

An 83(b) election might also keep an employee around longer than they would like, waiting to see stock options, and not wanting to have paid taxes on shares they will never receive .

What happens if a founder does not file an 83(b) election?

What are the steps to filing an 83(b) election, what is the best way to fill out an 83(b) form.

Be sure to carefully read over the form and fill in all applicable areas. A financial and/or legal advisor can be extremely helpful in ensuring the form is completed correctly.

How to report income from an 83(b) election

Does 83(b) election need to be attached to 1040.

Your 83(b) election form no longer needs to be attached to your form 1040.

Does your spouse need to sign 83(b) election?

Generally, a spouse only needs to sign the 83(b) election form if residing in a community property state.

Where do you send an 83(b) election?

Your 83(b) election form should be sent to the IRS center where you would normally file your income taxes. Information on this can be found on the official IRS website.

How do I know if the IRS received my 83(b) election?

It is strongly recommended to send your 83(b) form as certified mail requesting a r eturn receipt . By including a self-addressed stamped envelope and a request that the IRS return forms with a date stamp, you can ideally confirm receipt.

Update: the Internal Revenue Service has announced that it would temporarily allow Section 83(b) elections to be signed digitally or electronically (through October 31, 2023).

When is it detrimental to file an 83(b) Election?

Filing an 83(b) election can be a powerful tool for those who receive restricted stock units (RSUs) or other forms of equity compensation, but there are situations where it could be detrimental. Here are some scenarios in which filing an 83(b) election might not be the best choice:

Uncertain Future Value: If you’re unsure about the future value of the company’s stock, filing an 83(b) election might not be wise. By making this election, you’re essentially prepaying taxes based on the stock’s current value. If the stock value doesn’t increase as expected or even decreases, you’ll have paid unnecessary taxes.

Immediate Tax Burden: When you file an 83(b) election, you’re required to pay taxes on the stock’s fair market value at the time of the grant, even if it’s not yet vested. This can create a significant tax burden that you might struggle to cover if you’re short on cash.

Short-Term Employment: If you’re not planning to stay with the company for the vesting period, filing an 83(b) election might not make sense. You’ll be paying taxes on stock that you may never fully own, potentially losing out on valuable tax benefits.

Lack of Funds: Paying the taxes associated with an 83(b) election can be challenging if you don’t have the cash available. Using your own funds to cover the tax bill may not be practical, and you might end up having to sell some of the stock to cover the tax liability, defeating the purpose of the election.

Complex Tax Situation: If you have a complex tax situation or are not well-versed in tax matters, it’s essential to consult with a tax professional before making an 83(b) election. Filing it incorrectly or without a full understanding of the implications can lead to costly mistakes.

In conclusion, understanding the intricacies of the Section 83(b) election is paramount for startup founders navigating the world of equity compensation. This guide has shed light on the importance, benefits, and potential drawbacks of making this election. As a founder, the decision to file for an 83(b) election should align with your unique financial situation, long-term commitment to the company, and future growth projections. It’s a powerful tool that, when used wisely, can help you optimize your tax strategy and unlock the full potential of your equity awards. Remember, seeking professional advice and carefully weighing the pros and cons are essential steps on your journey toward building a successful startup and securing your financial future. Reach out to Finvisor today, we’re ready to help!

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83(b) Elections For Dummies

First, a few basics:.

• If you have stock options, you do not need to file an 83(b) Election Form, unless you exercised the option early.
• If you purchased/received founder’s stock and there are no restrictions, such as vesting, you do not need to file an 83(b) Election Form.
• If you purchased/received restricted stock in a growing startup, you should probably (about 99% of the time) file an 83(b) Election Form.

Here is why you want to file an 83(b) Election:

• If you think the value of your stock will increase, you will NOT be forced to pay taxes on “phantom income” each year.

Let’s give an example to show the consequences of not filing an 83(b) election:

• You own 10% of the stock of your startup. It vests over 4 years, or 25% per year.
• You purchased this stock for $100 (fair market value) on January 1 of Year 1.
• During Year 1, the Company raised some outside financing that values the company at $10M.
• At the end of Year 1, the value of the Company is $10M and the value of your stock is worth $1M.
• You have about $250K in taxable income in Year 1 ( [value of Company at year-end, $10M less value of Company at beginning of year, $1K] * ownership percentage, 10% * vesting % in Year 1, 25%).
• You owe about $100K in Federal and State taxes.
• You will pick up additional taxable income in Year 2 through Year 4 if the value of the startup continues to increase.
• You do not get any tax relief if the value of the Company decreases.
• Remember, this “phantom income” is triggered just by the value of the Company increasing – not by exercising the options or selling the stock.

Here is how to file an 83(b) election:

• Download the Sample 83(b) Election Form and Letter below.
• Sign the 83(b) Election Form and letter and follow the instructions in the letter.
• Mail the letter and 83(b) Election Form to the IRS address (see dropdown below for address) within 30 days after the stock grant (there is no relief if you file late).
• Mail Certified Return Receipt Requested to prove timely delivery.
• If you live in a community property state, your spouse also needs to sign the 83(b) Election Form.
• Give a copy of the signed 83(b) Election Form to the Company.

SAMPLE SECTION 83(b) ELECTION FORM:

[wpforms id=”1762″ title=”false”]

SAMPLE TRANSMITTAL LETTER TO IRS:

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WHERE TO MAIL THE LETTER AND 83(b) ELECTION FORM TO:

Before mailing, check the IRS instructions for Form 1040 and/or consult your tax advisor to ensure the addresses below are still valid as the IRS occasionally changes mailing addresses.

IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

83(b)s CAN BE CONFUSING.

Feel free to contact us to discuss

GET FREE HELP on 83(b) elections

Filed under: Blog , Equity Compensation , Tax .

What Is the Section 83(b) Election? A Guide for Startup Founders

Taxes are one of the few certainties in life, but that doesn’t mean we like to think about them. One of the most common—and most costly—mistakes we see startup founders make is forgetting to account for how their equity is taxed. 

On one level, this is understandable. It’s exciting to receive shares of restricted company stock and dream about how much those shares may be worth someday; it’s less exciting to think about how they’ll be taxed. But understanding how restricted stock is taxed can save you serious money, and the Section 83(b) election is central to that understanding. 

A Section 83(b) election is a short letter you send to the Internal Revenue Service (IRS) to clarify how you want to be taxed on your equity . In this guide, we’ll review everything a startup founder needs to know about Section 83(b) elections—from how they work to whether you may need to file one. We’ll also show you how filing an 83(b) election could save you thousands (and maybe even more) in terms of your overall equity tax bill. 

What is an 83(b) election?

How is restricted stock taxed, the tax benefits of filing an 83(b) election, potential disadvantages of filing an 83(b) election, how to fill in the section 83(b) election form, final thoughts for startup founders.

Section 83 of the Internal Revenue Code (IRC) addresses property transferred in connection with performance of services. Section 83(b) is a specific provision of the tax code that gives startup founders and employees the option to pay taxes on the fair market value of their restricted stock at the time it is granted. If you do not file an 83(b) election in time, your stock will be taxed on its fair market value at the time it vests.

In order to inform the IRS that you want to be taxed on the value of your restricted stock at the time of grant, you must file a Section 83(b) election. The Section 83(b) election is a short document that must be sent to the IRS no later than 30 days after receiving your restricted shares —so you can’t simply wait to send it in with the rest of your income tax return. 

Why vesting matters 

It’s important to note that the 83(b) election applies only to property subject to “a substantial risk of forfeiture.” Restricted stocks qualify because they are subject to vesting.

Vesting means that certain milestones must be met before the recipient is granted full ownership of the stock. This is a common restriction for startup equity . Typically, when a founder or employee is granted equity, they don’t get full ownership of it all at once. Instead, the stock vests based on a vesting schedule. This vesting schedule is often spread out across a period of time (e.g. four or five years) specified in the stock grant. In most cases, if the recipient leaves the company before the final vesting date, they forfeit rights to any unvested stock.

If you don’t file an 83(b) election, your restricted stock will be subject to ordinary income tax on its fair market value at the time it fully vests. Depending on your vesting schedule, it could take your stock years to fully vest. In that time, it’s certainly possible—perhaps even likely—that the fair market value of your stocks will grow.

So, waiting to pay taxes on your shares as they vest means that you will end up paying more taxes if the fair market value of your shares grows over time.

Before we go any deeper, it’s important to pause and review how restricted stock is taxed. Knowing how different tax rates work, and when they apply, can help you make a more informed decision about whether to file an 83(b) election.

Ordinary income tax vs. capital gains tax

Two different types of tax rates that may apply to equity are ordinary income and capital gains. 

If you received your restricted stock as part of your normal compensation (i.e. you paid nothing extra to receive it), its fair market value will be taxed at the applicable ordinary income tax rate . It will be considered taxable income regardless of whether you file an 83(b) election or not. Filing an 83(b) election only affects when your stock will be taxed.

Capital gains tax rates apply to profits you make on assets you already own. So, if you own stock that increases in value and you sell it at a later date, you will pay capital gains tax on your profit (the price you sold the stock for minus the price you paid for it).

There are two types of capital gains tax rates that differ based on their holding period:

• Short-term capital gains rates apply to profits you earn from selling assets you’ve held for a year or less. These are typically taxed at the ordinary or regular income tax rate, so they don’t confer any benefits. 
• Long-term capital gains rates apply to profits earned from selling assets you’ve held for longer than a year. Long-term capital gains tax rates are lower than ordinary income and short-term gains rates.

Since long-term capital gains rates are lower, these are the rates you want to optimize for if possible. The more your gains are taxed at the long-term capital gains rate, the lower your total tax liability.

When you file an 83(b) election, you are essentially fast-forwarding the timeline for when you will need to pay ordinary income tax on your stock. 

You can’t get out of paying ordinary income tax, but paying it earlier can make a big difference. There are two beneficial tax consequences of filing an 83(b) election:

• It accelerates the clock on when you owe ordinary income tax. By paying ordinary income tax on all of your shares at the time of grant, you are essentially betting that the value of those shares will increase over time. If you pay ordinary income tax earlier and your shares then increase in value, you will only be subject to capital gains tax on your profits. Conversely, if you wait to pay ordinary income tax as your shares vest, your tax liability will be higher if the fair market value of your shares gradually increases over time. Remember: You pay tax as a percentage of fair market value, not as a set amount.
• It accelerates the clock on when short-term capital gains become long-term capital gains. An added benefit to paying ordinary income tax earlier is that the clock on your capital gains starts earlier. Holding your shares for at least a year before selling them means that your gains will be taxed at the applicable long-term capital gains rate—which is sure to be lower than the short-term rate.

To better illustrate how this all works, let’s walk through a couple of examples featuring a startup founder named Jeanne.

In both examples, Jeanne is granted a restricted stock award (RSA) of 10,000 shares that vest over four years. The vesting schedule in Jeanne’s grant stipulates that 25% of her shares vest each year, assuming she remains at the company. The fair market value of the stock over the course of those four years increases as follows:

Example of taxes owed when filing an 83(b) election

If Jeanne files an 83(b) election within 30 days of her grant, she will owe ordinary income tax on $50,000 ($5 x 10,000 shares). 

But how much will Jeanne actually pay in taxes on her equity? The maximum ordinary income tax rate in 2022 is 37%, and the full fair market value of her stock will be subject to this tax rate. This means that she will pay 37% of $50,000, which comes out to an equity tax bill of $18,500 .

Now that Jeanne owns her stock and has paid ordinary income taxes on it, any profit she realizes will be taxed at capital gains rates when she decides to sell it.

Example of taxes owed without filing an 83(b) election

If Jeanne does not file an 83(b) election within 30 days of her grant, she will owe ordinary income tax (37%) on her shares as they vest. She won’t pay any taxes on her shares at the time of grant, but she will pay the following taxes on her shares as they vest:

• After Year 1, she will pay $9,250 ($10/share x 2,500 = $25,000) x 37%
• After Year 2, she will pay $13,875 ($15/share x  2,500 = $37,500) x 37%
• After Year 3, she will pay $18,500 ($20/share x  2,500 = $50,000) x 37%
• After Year 4, she will pay $23,125 ($25/share x  2,500 = $62,500) x 37%

Jeanne’s total tax liability without an 83(b) election comes out to a massive $64,750 . That means she’s paying $46,250 more in ordinary income tax than she would if she filed an 83(b) election. Yikes!

In some cases, it may not make sense to file an 83(b) election. 

The above examples assume that the value of the stock will continue to increase over time, but this is by no means guaranteed. If you file an 83(b) election and pay taxes on all of your shares at the time of grant, you should understand the risks. 

There are two scenarios in which filing an 83(b) election could end up hurting more than helping:

• If the value of your equity falls or if your company goes bankrupt, you may have paid taxes for shares that will ultimately be worth less or—in the worst case scenario— worthless . 
• If you decide to leave your company before your shares are fully vested, you will have paid taxes on shares that you never receive. And the prospect of losing shares that you already paid taxes on may compel you to stay at a company even if you’re unhappy. Not a great outcome, all around.

The 83(b) election doesn’t come with a clause that allows you to reclaim any taxes you may overpay at the time of grant, so in both of the above scenarios, you’d have to just eat the cost of the taxes you “pre-pay.”

You can find the 83(b) form here . 

It’s pretty quick to fill in, though you’ll need information about the fair market value of your restricted stock as well as some other information about your stock grant. A few other points to keep in mind once you’re ready to submit the form:

• Plan to make at least three copies of the signed and completed 83(b) form and one copy of the IRS cover letter.
• The original 83(b) form and cover letter go to the IRS along with a stamped and self-addressed return envelope.
• One copy of the completed 83(b) form goes to the company, and one is for your own record-keeping. You may need to attach a third copy to your state personal income tax return. Consult your tax advisor on this before sending it off, as it may not be necessary depending on where you live.

As we’ve demonstrated, the decision to file an 83(b) election is an important one that can result in substantial tax savings. And if you do decide to file an 83(b) election, make sure you do so within 30 days of receiving your stock award . Procrastination is rarely a good policy, but in this case it can make you an extra-grumpy taxpayer.

Oh, and one last thing: It’s always a good idea to consult with a tax advisor if you have questions about the 83(b) election (and even if you think you have it down pat). Some aspects aren’t the most intuitive. For example, the 83(b) election also applies when early exercising stock options, since this produces restricted shares.

If you’re interested in learning more about taxes and equity, we’d love to keep the conversation going. Schedule a call with a Pulley expert today and learn how we can help.

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• Getting Started

A founder's guide to making a section 83(b) election: six commonly asked questions

One of the more important tax decisions founders of early-stage companies will face is whether or not to make an election under Section 83(b) of the Internal Revenue Code for stock awards or other acquisitions of shares subject to vesting. By making this decision promptly upon acquiring the shares, founders can avoid missing the 83(b) filing deadline and protect themselves from significant tax consequences down the line. Below, we have set out six of the most commonly asked questions about Section 83(b):

What is a Section 83(b) election?

Section 83(b) of the Internal Revenue Code allows founders, employees and other service providers to accelerate the time for determining taxable income on restricted stock awards or purchases subject to vesting. A Section 83(b) election is made by sending a letter to the Internal Revenue Service requesting to be taxed on the date the restricted stock was granted or purchased rather than on the scheduled vesting dates.

Founders who decide to make an 83(b) election need to do so promptly to ensure that they do not miss the 83(b) filing deadline. An 83(b) election must be filed with the IRS within 30 days after the grant or purchase date of the restricted stock . The last possible day for filing is calculated by counting every day (including weekends and holidays) starting with the day after the grant date.

What are the benefits of an 83(b) election?

There are several reasons why filing an 83(b) election may be beneficial for a founder. Most notably, Section 83(b) of the Internal Revenue Code allows founders to accelerate the determination of taxable income on an award or purchase of restricted stock to the date it was granted rather than on the date(s) the shares vest. If the restricted stock is purchased for an amount equal to its fair market value, an 83(b) election will result in no recognition of income as of the purchase date. Additionally, an 83(b) election advances the beginning of the one-year long-term capital gain holding period, often resulting in preferential capital gain rather than ordinary tax treatment upon sale (long-term capital gain tax rates are 0, 15 and 20 percent for most taxpayers). Simply stated, an 83(b) election can result in significant tax savings under the right circumstances.

What happens if a founder does not file an 83(b) election?

If a Section 83(b) election is not filed by the deadline, a founder would pay taxes on restricted stock grants at each vesting date. The founder's tax would be assessed at ordinary income rates on the amount by which the stock's value on the vesting date exceeds the purchase price, if any. This may result in a significant tax obligation if the value of the shares has increased substantially over time.

What are the risks of an 83(b) election?

Despite its benefits, the 83(b) election is not without risk. Making a Section 83(b) election accelerates the date that taxable income is recognized from the vesting date to the date the restricted stock is granted or purchased. This means that if a founder makes an 83(b) election, pays taxes on income based on the fair market value of the shares on the grant date, and then later forfeits his or her shares, the founder may have paid tax on unrealized income.

What scenarios could make an 83(b) election more or less advantageous?

All things considered, a Section 83(b) election will likely be more (or less) advantageous for a founder in the following scenarios: 

What are the steps to filing an 83(b) election?

To make an 83(b) election, the following steps must be completed within 30 days of the grant date:

• Complete a Section 83(b) election letter
• Mail the completed letter to the IRS within 30 days of your grant date: Mail to the IRS Service Center where you file your tax return — the address for your IRS Service Center can be found here . Preferably send the letter by certified mail and request a return receipt.
• Mail a copy of the completed letter to your employer.
• Retain one copy of the completed and filed letter for your records and retain proof of mailing.

As always, founders should consult with their tax advisors to determine how a Section 83(b) election applies to their individual circumstances.

• Stock options
• Exercising stock options

What is the 83(b) election – and when should you file it?

If you have stock options and decide to exercise them early, the 83(b) election is the tax formality that makes your early exercise official to the IRS.

You must file an 83(b) election with the IRS within 30 days of completing your early exericse.

If you have stock options and want to get the full picture of how they work, read our Stock Option Starter Guide .

How do I file an 83(b) election?

• Fill out an election form and cover letter. Find an 83(b) election template online, or ask your accountant or equity strategist to populate one for you.
• Make three copies of the signed election form.
• Send the signed election form and cover letter to your appropriate IRS office, which you can find on the IRS website. Make sure to mail the envelope via certified mail and request a return receipt.
• Send a signed election form to your company.
• Keep the last signed election form with the return receipt for your personal records.

You must do all of this within 30 days of early exercising your stock options.

Don’t wait on this. A timely filing can mean the difference between paying nothing versus a huge and unexpected tax bill down the road.

Why would I want to early exercise my stock options?

Because it could minimize your stock option tax bill and keep the upfront costs of exercising low. To learn more, see " What is early exercising? "

What does the 83(b) election mean technically?

The name refers to a provision under section 83(b) of the U.S. tax code that allows you to elect being taxed on your equity compensation today versus when it vests.

By filing a 83(b) election, you can pay tax on the 409A valuation (also known as fair market value) of company shares today versus their 409A valuation in the future, which will likely be higher. The 409A valuation is reevaluated every once in a while, and grows when your company becomes more successful. 

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83(b) Election - What to File and When?

Scott Orn leverages his extensive venture capital experience from Lighthouse Capital and Hambrecht & Quist. With a track record of over 100 investments ranging from seed to Series A and beyond in startups, including notable deals with Angie’s List and Impossible Foods, Scott brings invaluable insights into financing strategies for emerging companies. His strategic role in scaling Kruze Consulting across major U.S. startup hubs underscores his expertise in guiding startups through complex financial landscapes.

Today I’m answering the question, what is an 83(b) election , and how and when to file?  If you want to save on your business taxes, this is a must-read.

What is an 83(b) Election?  

The 83(b) election is a formal letter that you send into the IRS telling the IRS that you are electing to buy your stock immediately, even if it hasn’t all vested yet, and you are looking to lock in a low tax basis. 

Therefore, all appreciation after you’ve filed an 83(b), and after you bought that stock, is going to be taxed at a capital gains rate, which is about 20%. 

If your company IPOs someday, you are going to have a huge gain, and will only have to pay capital gains tax. 

Why Should You File an 83(b) Election?

This election is named after Section 83(b) of the Internal Revenue Code. When a founder or employee is granted restricted stock by a startup, it means they receive shares subject to certain rules. These restrictions may include a vesting schedule or other conditions that must be met for the shares to become fully transferable or non-forfeitable. Without making an 83(b) election, those founders or employees would typically be taxed on the value of the stock when it vests.

The 83(b) election can be a strategic tax planning tool, offering the potential for lower tax liability and the opportunity to optimize your tax position based on your expectations for the company’s growth. 

An 83(b) Election Can Reduce Your Future Tax Liability - Sometimes Dramatically 

By making an 83(b) election, you’re choosing to recognize the income associated with the restricted stock at the time of grant, even before it vests. This means you’re opting to pay taxes on the stock’s fair market value now, in exchange for a better tax rate later when your stock vests. So if you believe the value of your startup is going to increase significantly, you may find making an 83(b) election advantageous.

It’s important to note that an 83(b) election involves some risk. If the startup doesn’t succeed or the value of the stock decreases, you may have paid taxes on a higher value than the stock eventually proves to be worth. Founders should carefully consider their specific circumstances and consult with tax professionals before making this election.

What Do You Need to File?

Filing an 83(b) election isn’t that complicated, but it does have to be done in a timely manner, within 30 days of receiving your stock grant. So here are the steps you need to follow to complete the form. Below you’ll find information on how you actually need to file your election. It’s always a good idea to consult with your personal tax advisor or CPA; use this information and form at your own risk.

• Start by downloading this IRS Section 83(b) Election Form . You’re going to need some information to fill out the form, including the fair market value of the shares you’re receiving and the total amount of income that will be added to your gross income. There’s also a sample cover letter for you to include when you mail in your form. 
• If you live in Florida, Georgia, North Carolina, or South Carolina send your form to Department of the Treasury, Internal Revenue Service, Atlanta, GA 39901-0002 .
• If you live in Arkansas, Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, or West Virginia, send your form to Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999-0002 .
• If you live in Alabama, Kentucky, Louisiana, Mississippi, Tennessee, or Texas, send your form to Department of the Treasury, Internal Revenue Service, Austin, TX 73301-0002 .
• If you live in Alaska, California, Hawaii, Ohio and Washington state, send your form to Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0002 .
• If you live in a foreign country, American Samoa, or Puerto Rico (or are excluding income under Internal Revenue Code section 933) or use an APO or FPO address, or file Form 2555, 2555-EZ, or 4563, or are a dual-status alien or nonpermanent resident of Guam or the Virgin Islands, send your form to Department of the Treasury, Internal Revenue Service, Austin, TX 73301-0215 .
• If you are a permanent resident of Guam, send your form to Department of Revenue and Taxation, Government of Guam, PO Box 23607, GMF, GU 96921 . 
• If you are a permanent resident of the Virgin Islands, send your form to VI Bureau of Internal Revenue, 9601 Estate Thomas, Charlotte Amalie, St. Thomas, VI 00802 .
• Section 1 : Write your name, address, and Social Security Number on the appropriate lines. 
• Section 2 : Provide the number of shares and a description of the shares for which you’re making the 83(b) election. 
• Section 3 : Insert the calendar year during which you were granted your restricted stock. 
• Section 4 : Describe the restrictions on your stock award. You can find this information in your stock award agreement. 
• Section 5 : Note the closing price of your company’s stock on the grant date.
• Section 6 : Note the amount you paid for your stock award. If you didn’t pay anything, state that no amount was paid for your shares. 
• Sign and date the form. You’ll need three copies (see below for more details on filing your election).

What if you don’t file an 83(b)?

If you forget or just don’t send in an 83(b) election form, you will have to pay income tax on the delta of appreciation every year as the stock vests. So if a stock goes up in value after the first year or two, you are going to have to pay income tax on that appreciation. And income tax rates are somewhere between 30 and 40%. 

So there’s a really big delta there. You are talking about a lot of money, especially if your company gets bought or IPOs. 

Additionally, you are setting the clock for your capital gains taxation period. Basically, if you hold your stock for long enough, when the company is sold or you sell the stock after it goes public, you either, personally, pay income tax or capital gains tax. In the US, long-term capital gains taxes are much, much lower. So you want to get that clock running as soon as possible so that you maximize the amount of gains that you get to claim as long-term capital gains. 

When and How to File an 83(b) Election:

You only have 30 days to elect an 83(b) so do it right away, ideally the day your company is incorporated. Your trusted tax professionals can help you. 

Fill out that 83(b) election form that was provided to you, and mail it in to the IRS with certified mail to have proof that you sent it in. Note the certified mail part - more on that in a bit - but it’s really the only way to confirm that the IRS actually got your election. 

More detail on how to actually file the election

• Prepare Your 83(b) Election Form: Ensure that your form is accurately filled out and includes all the necessary information.
• Make 3 copies of the form - one for yourself (keep this in a safe place), one to give to your startup, and one to send to the IRS.
• Visit Your Local Post Office: You cannot send certified mail from your home mailbox; it needs to be processed at a post office.
• Request Certified Mail Service: At the post office, inform the clerk that you want to send your envelope via certified mail. You’ll be given a certified mail form to fill out.
• Attach the Certified Mail Form: The form has a barcode for tracking and a perforated receipt. Attach the form to the front of your envelope, as directed.
• Pay for Postage and Fees: Certified mail costs slightly more than regular postage. Pay the required amount, which will include the postage and a small fee for the certified service.
• Obtain a Mailing Receipt: After processing, you’ll receive a mailing receipt. Keep this as it’s your proof of mailing.
• Track Your Mail: Use the tracking number on your receipt to monitor the delivery status online through the USPS website.
• Wait for Delivery Confirmation: Once delivered, you’ll receive an electronic confirmation of the date and time of delivery and the recipient’s signature.
• Ask your personal tax CPA if you need to append a copy of the form to your state tax returns - some states have specific rules, so consulting with your tax person. 

Where to file an 83(b) election?

Mail your completed 83(b) letter to the same IRS Service Center address where you mail your personal tax returns - make sure to consult with your personal tax CPA so that you have the right address.  For example, the Fresno California processing center was closed down, so California tax payers now use the Utah IRS Service Center. Check the IRS’ website for addresses to mail many tax forms here . 

Can you efile an 83(b) election?

No - the IRS doesn’t have a method to accept electronically filed 83(b) elections! Founders have to print and mail their elections! There is a push to make it possible to efile the election, but as of early 2024, there is no way to efile it. Carta does have an 83(b) solution where they will generate the form in a printable format, but it still need to be physically printed and mailed to the IRS. 

How do you confirm with the IRS that they got your 83(b) election? 

Really, the only way to confirm that the IRS got your election is to send the election using certified mail. When you send something by certified mail, you’ll receive a mailing receipt and a unique tracking number. Additionally, the IRS or any recipient must sign upon delivery, providing you with an electronic verification that the document was received. This is proof that they got your filing - keep it so that if there are any problems down the line you have the proof!

In closing, filing an 83(b) form is worth it. Again, make sure to file within the allotted time frame. This will ensure that your company gets favorable tax treatment. 

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What Is the 83(b) Election?

How an 83(b) election works, how to file an 83(b) election.

• Tax Strategy

Benefits of 83(b) Election

• What Happens if You Don't Make an 83(b) Election?

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83(b) Election: Tax Strategy and When and Why to File

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Investopedia / Xiaojie Liu

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock  at the time of granting.

Key Takeaways

• The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.
• The 83(b) election applies to equity that is subject to vesting.
• The 83(b) election alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

In effect, an 83(b) election means that you pre-pay your tax liability on a low valuation, assuming the equity value increases in the following years. However, if the value of the company instead declines consistently and continuously, this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on higher equity valuation.

Typically, when a founder or employee receives compensation of equity in a company, the stake is subject to income tax according to its value. The tax liability is based on the fair market value of the equity at the time of the granting or transfer, minus any cost of exercising or buying the equity shares. The tax due must be paid in the actual year the stock is issued or transferred.

However, in many cases, the individual receives equity vesting over several years. Employees may earn company shares as they remain employed over time. In that case, the tax on the equity value is due at the time of vesting. If the company’s value grows over the vesting period, the tax paid during each vested year will also rise in accordance.

1. Create Document With Taxpayer Information

You will need to create a document to send to the IRS that includes the following information:

• The taxpayer's name, address, Social Security number
• The number of awarded shares plus a description of them for which you are making the Section 83(b) election
• The calendar year in which the restricted stock was awarded
• The date of the transfer
• Any restrictions the property is subject to
• The fair market value of the property at the time of transfer (price per share x number of shares)
• The amount paid for the shares (price per share x number of shares)
• The amount to include in gross income (fair market value minus amount paid for the shares)

2. Mail the Document to the IRS

Date and sign the document and mail it to the IRS within 30 days after the issuing of the restricted shares. Address it to the IRS Service Center where you file your taxes. If the thirtieth day falls on a Saturday, Sunday, or a legal holiday, the election documents must be postmarked by the next business day.

3. Submit a Copy of the Form to Your Employer

In addition to notifying the IRS of the election, you must also submit a copy of the completed election form to your employer.

4. Include it With Your Income Tax Return

Include a copy of the election with your income tax return for the taxable year in which the restricted stock was transferred to you.

With an 83(b) Election

Let's say a co-founder of a company is granted 1 million shares subject to vesting and valued at $0.001 at the time the shares are granted. At this time, the shares are worth the  par value  of $0.001 x number of shares, or $1,000, which the co-founder pays. The shares represent a 10% ownership of the firm for the co-founder and will be vested over a period of five years, which means that they will receive 200,000 shares every year for five years. In each of the five vested years, they will have to pay tax on the fair market value of the 200,000 shares vested.  

If the total value of the company’s equity increases to $100,000, then the co-founder’s 10% value increases to $10,000 from $1,000. The co-founder's tax liability for year 1 will be deduced from ($10,000 - $1,000) x 20% i.e., in effect, ($100,000 - $10,000) x 10% x 20% = $1,800.

• $100,000 is the Year 1 value of the firm
• $10,000 is the value of the firm at inception or the book value
• 10% is the ownership stake of the co-founder
• 20% represents the 5-year vesting period for the co-founder's 1 million shares (200,000 shares/1 million shares)

If, in year 2, the stock value increases further to $500,000, then the co-founder's taxes will be ($500,000 - $10,000) x 10% x 20% = $9,800. By year 3, the value goes up to $1 million and the tax liability will be assessed from ($1 million - $10,000) x 10% x 20% = $19,800. Of course, if the total value of equity keeps climbing in Year 4 and Year 5, the co-founder’s additional taxable income will also increase for each of the years.

If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on their gains from the proceeds of the sale.

Without an 83(b) Election

Now let's say that the co-founder decides instead not to pay taxes on the restricted stock before it begins to vest. In that case, they will be paying taxes on the shares at the end of the vesting period, five years later. If those million shares are now trading at $2 a share, they will be worth $2 million upon vesting. The co-founder will have to report that amount as ordinary income, minus the $1,000 they paid at the time the shares were granted, paying the highest possible tax rate on the entire gain during the vesting period.

For restricted stock, you must file your 83(b) election within 30 days of receiving your shares. For stock options , you must file 83(b) within 30 days of exercising your options.

83(b) Election Tax Strategy

The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. This tax strategy allows the co-founder to only pay taxes on the fair market value of the shares, minus the cost of exercising the options. If the fair market value of the shares is equal to their strike price , the taxable gain is zero.

The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income. The share value during the five-year vesting period will not matter as the co-founder won’t pay any additional tax and gets to retain the vested shares. However, if the shares are sold for a profit, a capital gains tax will be applied.  

Following our example above, if the co-founder makes an 83(b) election to pay tax on the value of the stock upon issuance, the tax assessment will be made on the difference between the shares' strike price and their fair market value .

If the stock is sold after, say, 10 years for $250,000, the taxable capital gain will be on $249,000 ($250,000 - $1,000 = $249,000).

The 83(b) election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

In a reverse scenario where the 83(b) election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election. For example, consider an employee whose total tax liability upfront after filing for an 83(b) election is $50,000. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83(b) election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant.

Another instance where an 83(b) election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time of stock granting, filing for an 83(b) election will not make much sense.

An 83(b) election offers significant benefits for individuals receiving restricted stock or property. By choosing this option, they can pay taxes upfront based on the property's fair market value at the time of grant, potentially at a lower rate compared to when it vests. This upfront taxation can lead to tax savings, especially if the property's value is expected to appreciate significantly.

Furthermore, making the election allows for more favorable tax treatment on future gains, taxing appreciation at the lower capital gains rate rather than ordinary income. Additionally, individuals who make the 83(b) election may have the opportunity to deduct losses if the property's value decreases before vesting, providing a level of tax flexibility and protection.

Overall, the 83(b) election offers a strategic approach to managing tax liabilities and optimizing tax treatment for recipients of restricted property.

When Is It Beneficial to File 83(b) Election?

An 83(b) election allows for the pre-payment of the tax liability on the total fair market value of the restricted stock at the time of granting. It is beneficial only if the restricted stock's value increases in the subsequent years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

What Happens if You Don't Make an 83(b) Election?

Failing to make an 83(b) election can have significant tax consequences for individuals who receive restricted stock or other property subject to vesting. When restricted stock or property vests, you'll be taxed on its value as ordinary income at that time, potentially resulting in higher taxes. Without the election, any future appreciation in the property's value will be subject to capital gains tax upon sale, possibly leading to less favorable tax treatment overall.

When Is It Detrimental to File an 83(b) Election?

If an 83(b) election was filed with the IRS and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election.

Another instance is if the employee leaves the firm before the vesting period is over; then the filing of an 83(b) election would turn out to be a disadvantage as they would have paid taxes on shares they would never receive. Also, if the amount of reported income is substantial at the time of the stock granting, filing for an 83(b) election will not make much sense.

What Is Profits Interest?

Profits interest refers to an equity right based on the future value of a partnership awarded to an individual for their service to the partnership. The award consists of receiving a percentage of profits from a partnership without having to contribute capital. In effect, it is a form of equity compensation and is used as a means of incentivizing employees when monetary compensation may be difficult due to limited funds, such as with a start-up limited liability company (LLC). Usually, this type of worker compensation requires an 83(b) election.

An 83(b) election allows someone to pay taxes on their stock awards at the time that they are granted, rather than at the time of vesting. This tax law is of particular benefit to startup employees, who may receive a large part of their compensation in the form of restricted stock or stock options. Since startups hope that their share value will increase rapidly, an 83(b) election allows these employees to reduce their tax burden in the long term.

Correction: June 14, 2023— An older version of this article incorrectly stated that someone making an 83(b) election would be taxed according to the cost of exercising their shares. In fact, the tax is based on the difference between the fair market value of the shares and the exercise price.

Internal Revenue Service. " 26 CFR 1.83-2: Election to Include in Gross Income in Year of Transfer ," Pages 1-3.

Internal Revenue Service. " 26 CFR 1.83-2: Election to Include in Gross Income in Year of Transfer ," Pages 1-6.

Internal Revenue Service. " Topic No. 427 Stock Options ."

Fidelity. " Instructions for Completing IRS Section 83(b) Form ."

Internal Revenue Service. " 26 CFR 1.83-2: Election to Include Gross Income in Year of Transfer ."

Internal Revenue Service. " 26 CFR 1.83-2: Election to include in gross income in year of transfer ," Page 6.

Internal Revenue Service. " Topic No. 409, Capital Gains and Losses ."

JPMorgan Chase. " Stock-Based Compensation and the 83(b) Election ."

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Seraf Toolbox: Dealing with Restricted Stock - Model IRS 83(b) Election Form

Note: This article is part of an  ongoing series  on Board Directors. To learn more about their roles and responsibilities, download this free eBook today   Director's Guidebook: How to be an Effective Board Director in Early Stage Companies  or  purchase our books at Amazon.com .

Many years ago I joined the board of a company after my angel group became the lead investor in the company’s seed financing round. As part of my compensation for being a board member, the company issued me restricted stock . Since I was new to the early stage investing world, I didn’t understand what the tax implications were with restricted stock. It’s unfortunate that I didn’t get good tax planning advice at the time, because if I had, it would have saved me a significant amount on my tax bill when the company was acquired for a very significant price!

Fortunately, you don’t have to make the same mistake I did. To help you avoid my fate, let’s get started and provide you with some critical planning advice to help you put better plans in place. After you read this article, you should have a basic understanding of the following items:

What is Restricted Stock ?

What is an IRS Section 83(b) Election?

What do I need to do to file an 83(b) Election?

What are the tax implications when you file an 83(b) Election?

Restricted Stock is given to employees, directors and advisors of early stage companies as a form of compensation . It’s called restricted stock because your ownership rights are imperfect or restricted. There may be vesting conditions which need to lapse or there may be “restrictions” on when the shareholder is able to sell this stock. Most restricted stock grants require that the shareholder be active with the company for a certain number of years in order to fully own all of the restricted stock.

Download the Sample IRS Section 83(b) Election Form >>

An IRS Section 83(b) Election is an approach to minimizing the amount of tax you will pay as you vest your stock. What you are basically doing is opting to pay taxes earlier than you have to (1) to lock in a low value at that time and (2) in exchange for a better rate later on. In effect, you declare ownership early, and pay ordinary income taxes on your ownership when the stock is less valuable and then later pay the lower capital gains tax rate on the increase in value.  

How does this work? In the early days of a startup company, the fair market value of the stock is pretty low because the company isn’t worth that much. Over time, the stock becomes more valuable as the company grows its revenues and builds value for its shareholders. Since restricted stock is treated as income by the IRS, it’s best to recognize that income on your taxes when the company’s stock is at a low value. Filing an 83(b) Election is allowing you to recognize, by approval of the IRS, the value of the restricted stock at the date of the election versus later as the stock vests.

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Filing an 83(b) Election is not that complicated, but it does require a fair number of steps and it must be done in a very timely fashion. The first thing to be aware of is you must file your 83(b) Election within 30 days of receiving the grant. That’s not much time to get your paperwork filed, but those are the rules! Now, here are all the steps you must take to make a proper election…

Start by downloading a Sample IRS Section 83(b) Election Form .  There are a few items you will need to know to fill out the form, including the fair market value price of the shares you are receiving and the total amount of income that will be added to your gross income.

If you download this sample form, you will also notice a sample cover letter that you should fill out and include when you mail your 83(b) Election Form.

Once you complete the 83(b) Election Form and the cover letter, you should mail them to the IRS Service Center where you typically file your federal income taxes. If you are a stickler about keeping tidy records, you can send your mail by certified mail and request a return receipt. And, make sure you send these documents within 30 days of receiving the grant!

The final item on your task list is to mail a copy of the 83(b) Election Form to the company for their financial records.

It’s also important that you understand the tax implications when you file an 83(b) Election. There are three types of tax rates you need to be aware of to understand how filing an 83(b) will affect the amount of tax you ultimately pay out.

Ordinary Income Tax Rate: For high income individuals (which I assume includes most people who end up receiving restricted stock!), this tax rate is the highest rate you will pay. In 2016, the maximum rate was set at 39.6%.

Short Term Capital Gains Tax Rate: If you sell your stock after holding it for less than one full year, you will pay taxes at the Short Term Rate. In 2016, your Short Term Rate was the same as your Ordinary Income Tax Rate.

Long Term Capital Gains Tax Rate: If you sell your stock after holding it for more than one full year, you will pay taxes at the Long Term Rate. In 2016, the Long Term Rate was 20%.

One goal of filing an 83(b) Election is to limit the amount of taxes you pay while your stock is vesting. To illustrate how an 83(b) Election works for your taxes, let’s walk through a very simple example.

You receive a grant of 100,000 shares that are valued at $0.05 per share at the time of the grant. If you file an 83(b) Election within 30 days of this grant, you will need to include $5,000 of income on your taxes for that year. If you are in the highest tax bracket (39.6%), you will pay $1,980 in Federal Taxes.

Now, let’s say you don’t file an 83(b) Election. In this case, you will pay taxes over a four year period as follows.

To keep this example as simple as possible, I will assume that your stock vests at a rate of 25% each year. So every year, you vest 25,000 shares. And, again to keep this simple, I will assume that the stock appreciates in value each year by $0.05 per share. That’s a conservative assumption for a company that’s doing reasonably well and showing solid growth.

At the end of year one, you vest 25,000 shares and the price of those shares is $0.10 at the time of vesting. Your income for the year is $2,500 and you pay $990 in Federal Taxes (39.6% of $2,500).

At the end of year two, three and four, you vest 25,000 shares each year. The price of the shares is $0.15 at year two, $0.20 at year three and $0.25 at year four. Your income for each of those years is $3,750, $5,000 and $6,250. And finally, your Federal tax payments are $1,485, $1,980 and $2,475.

All told, you will pay $6,930 in Federal Taxes during the four year vesting period.

In this example, by filing an 83(b) Election, you saved $4,950 on your Federal Tax bill. Not a bad savings for a few minutes of work!

There’s one other potential large tax savings if you file an 83(b). That savings relates to a reduction of the Long Term Capital Gains tax you pay when holding stock for more than five years. This significant tax reduction is described in IRS Section 1202 of the US Federal Tax Code.

It’s possible to pay no Long Term Capital Gains on your Federal tax return for stock held more than five years. By paying taxes on your restricted stock when you first receive the grant, you start the clock ticking on the five year holding period right away. If you wait to pay taxes on the stock at each year of vesting, you push out the five year holding period. So, for example, if the company is acquired 6 years after your initial restricted stock grant, you will pay no Federal capital gains on that stock if you filed an 83(b). If you didn’t file an 83(b), you will pay Federal capital gains tax on the stock you vested in years 2, 3 and 4. And, that could be a BIG tax hit!!

Beware of the one downside to the 83(b) Election. If the company goes out of business a year or so after you file your 83(b), you will have paid taxes on value you will never receive, and you can’t get those tax payments refunded.

Since taxes can be quite complicated, you should talk to your financial advisor / accountant to make sure you are doing the right thing given your personal financial situation. To learn more on restricted stock, read  Pure Upside: Understanding Stock Options and Restricted Stock for Angels .

For a more in-depth discussion on early stage company board issues, download our companion eBook:  Director’s Guidebook: How to be an Effective Board Director in Early Stage Companies  or  purchase our books at Amazon.com . 

To access additional resources and download more templates, view our entire  Director’s Guidebook Series  and  Startup Board Dynamics Series.

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What Is A Section 83(B) Election And Why Should You File One?

Contributor.

Update: on April 15, 2021, the Internal Revenue Service announced that it would temporarily (through December 31, 2021) allow Section 83(b) elections to be signed digitally or electronically, instead of requiring handwritten signatures.

Many founders come to us with questions about  Section 83(b) elections . They have often heard in startup circles that they need to file these, but may not understand when it makes sense to do so or what problem the  Section 83(b) election  solves. This article seeks to clear up some of the confusion about Section 83(b) elections.

So what is a Section 83(b) election? It's a letter you send to the Internal Revenue Service letting them know you'd like to be taxed on your  equity , such as shares of restricted stock, on the date the equity was granted to you rather than on the date the equity vests. Put simply, it accelerates your ordinary income tax. Please note that Section 83(b) elections are applicable only for stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant.

A Little Background on Taxes

To provide some simple tax background, there are different types of tax rates. The maximum  ordinary income tax  rate in 2020 is 37%, whereas the maximum  long-term  capital gains  rate in 2020 is 20%. Because the United States uses graduated tax rates (meaning the rates vary based on your income), you may actually be subject to lower rates, but in each case the long-term capital gains rate will be lower than the ordinary income tax rate.

Assuming you paid nothing for your restricted stock, you will be taxed on the value of your restricted stock as determined at grant (if a Section 83(b) election is filed), or at vesting (if no Section 83(b) election is filed), in each case at the applicable ordinary income tax rate. When you later sell your stock, assuming it's been more than one year from the date of grant (if a Section 83(b) election is filed), or more than one year from the date of vesting (if no Section 83(b) election is filed), the additional gain will be taxed at the applicable long-term capital gains rate. Because the long-term capital gains rate will be lower, the goal here is to get as much of your gain as possible taxed using that rate, rather than the ordinary income tax rate.

Two Simple Examples

In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant, $1.00 per share at the time of vesting, and $5.00 per share when sold more than one year later. We'll also assume you are subject to the maximum ordinary income tax rate and long-term capital gains rate. For simplicity, we will not discuss employment tax or state tax consequences.

Example 1 – 83(b) Election

In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $1,000. You pay ordinary income tax of $370 (i.e., $1,000 x 37%). Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the sale. On the sale (which occurs more than one year after the date of grant) you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01 per share you already took into income), and pay additional tax of $99,800 (i.e., $499,000 x 20%). Your economic gain after tax? $399,830 (i.e., $500,000 minus $370 minus $99,800).

Example 2 – No 83(b) Election

In this example you do not file a Section 83(b) election. So you pay no tax at grant (because the shares are unvested), but instead recognize income of $100,000 when the shares vest and thus have ordinary income tax of $37,000. On the sale (which occurs more than one year after the date of vesting) you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay additional tax of $80,000 (i.e., $400,000 x 20%). Your economic gain after tax? $383,000 (i.e., $500,000 minus $37,000 minus $80,000).

So in the above example, filing a Section 83(b) election would have saved you $16,830 .

Filing a Section 83(b) election also has two other benefits. It would have prevented you from having a $37,000 tax hit when the stock vested, which may have been at a time you may not have had cash to pay the tax, and it also starts your long-term capital gains (and qualified small business stock) holding period clock earlier – meaning that you get the long-term capital gains rate as long as the sale of your shares occurs more than a year after grant, rather than a year after vesting (and, in the case of qualified small business stock, you can avoid federal tax entirely if the sale occurs more than five years after grant and certain other conditions are met). For more information on qualified small business stock, please see  this article .

So, you may ask, "if Section 83(b) elections are so beneficial, why doesn't everyone file one?" If you receive restricted stock worth a nominal amount, it virtually always makes sense to file one. However, what if instead of receiving 100,000 shares of restricted stock worth $.01 per share, you received 100,000 shares of restricted stock worth $1.00 per share? Filing a tax code Section 83(b) election would immediately cause you tens of thousands of dollars of tax. And if the company subsequently fails, and in particular if it fails before your stock vests, you likely would have been economically better off to not have filed a Section 83(b) election.

Bottom line – discuss with your individual tax advisor, but remember that the filing must be made (if at all) within 30 days after the grant date of your restricted stock, as that is an absolute deadline that cannot be cured. And note that the grant date of your restricted stock is usually the date the board approves the grant, even if you don't receive the restricted stock paperwork until later – so sometimes you need to act fast in making this decision and filing the correct paperwork.

Instructions for Filing a Section 83(b) Election

The instructions below are intended for  individual US-based purchasers  based on  regulations issued  in July 2016. You should contact your tax professional to review your Section 83(b) election before filing with the IRS. Other purchasers, including corporate or trust purchasers, should contact legal and tax professionals licensed in their jurisdiction.

Please note that the election must be filed with the IRS within 30 days of the date of your restricted stock grant . Failure to file within that time will render the election void and you may recognize ordinary taxable income as your vesting restrictions lapse.

• Make  three  copies of the completed and signed election form and one copy of the IRS cover letter.
• Send the  original  completed and signed election form and cover letter, the copy of the cover letter, and a self-addressed stamped return envelope to the Internal Revenue Service Center where you would otherwise file your tax return. Even if an address for an Internal Revenue Service Center is already included in the forms below, it is your obligation to verify such address. This can be done by searching for the term "where to file" on  www.irs.gov  or by calling 1 (800) 829-1040. Sending the election via certified mail, requesting a return receipt, with the certified mail number written on the cover letter is also recommended.
• Deliver one copy of the completed election form to the Company.
• Applicable state law  may  require that you attach a copy of the completed election form to your state personal income tax return(s) when you file it for the year (assuming you file a state personal income tax return). Please consult your personal tax advisor(s) to determine whether or not a copy of this Section 83(b) election should be filed with your state personal income tax return(s).
• Retain one copy of the completed election form for your personal permanent records.

Note: an additional copy of the completed election form must be delivered to the transferee (recipient) of the property if the  service provider  and the transferee are not the same person.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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What is a Section 83(b) Election and Why Should You File One?

Many founders come to us with questions about Section 83(b) elections . They have often heard in startup circles that they need to file these, but may not understand when it makes sense to do so or what problem the Section 83(b) election solves. This article seeks to clear up some of the confusion about Section 83(b) elections.

So what is a Section 83(b) election?  It’s a letter you send to the Internal Revenue Service letting them know you’d like to be taxed on your equity , such as shares of restricted stock, on the date the equity was granted to you rather than on the date the equity vests. Put simply, it accelerates your ordinary income tax. Please note that Section 83(b) elections are applicable only for stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant.

A Little Background on Taxes

To provide some simple tax background, there are different types of tax rates.  The maximum ordinary income tax rate in 2023 is 37%, whereas the maximum long-term capital gains rate in 2023 is 20%.  Because the United States uses graduated tax rates (meaning the rates vary based on your income), you may actually be subject to lower rates. Also, additional taxes may apply to increase your total effective tax rate in certain circumstances. Generally, however, your long-term capital gains will be taxed at a lower rate than your ordinary income in each case.

Assuming you paid nothing for your restricted stock, you will be taxed on the value of your restricted stock as determined at grant (if a Section 83(b) election is filed), or at vesting (if no Section 83(b) election is filed), in each case at the applicable ordinary income tax rate.  When you later sell your stock, assuming it’s been more than one year from the date of grant (if a Section 83(b) election is filed), or more than one year from the date of vesting (if no Section 83(b) election is filed), the additional gain will be taxed at the applicable long-term capital gains rate.  Because the long-term capital gains rate will be lower, the goal here is to get as much of your gain as possible taxed using that rate, rather than the ordinary income tax rate.

Two Simple Examples

In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant, $1.00 per share at the time of vesting, and $5.00 per share when sold more than one year later.  We’ll also assume you are subject to the maximum ordinary income tax rate and long-term capital gains rate.  For simplicity, we will not discuss employment tax or state tax consequences.

Example 1 – 83(b) Election

In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $1,000.  You pay ordinary income tax of $370 (i.e., $1,000 x 37%).  Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the sale.  On the sale (which occurs more than one year after the date of grant) you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01 per share you already took into income), and pay additional tax of $99,800 (i.e., $499,000 x 20%).  Your economic gain after tax?   $399,830 (i.e., $500,000 minus $370 minus $99,800).

Example 2 – No 83(b) Election

In this example you do not file a Section 83(b) election.  So you pay no tax at grant (because the shares are unvested), but instead recognize income of $100,000 when the shares vest and thus have ordinary income tax of $37,000.  On the sale (which occurs more than one year after the date of vesting) you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay additional tax of $80,000 (i.e., $400,000 x 20%).  Your economic gain after tax? $383,000 (i.e., $500,000 minus $37,000 minus $80,000).

So in the above example, filing a Section 83(b) election would have saved you $16,830 .

Filing a Section 83(b) election also has two other benefits.  It would have prevented you from having a $37,000 tax hit when the stock vested, which may have been at a time you may not have had cash to pay the tax, and it also starts your long-term capital gains (and qualified small business stock) holding period clock earlier – meaning that you get the long-term capital gains rate as long as the sale of your shares occurs more than a year after grant, rather than a year after vesting (and, in the case of qualified small business stock, you can avoid federal tax entirely on some or all of your gain if the sale occurs more than five years after grant and certain other conditions are met). For more information on qualified small business stock, please see this article .

So, you may ask, “if Section 83(b) elections are so beneficial, why doesn’t everyone file one?”  If you receive restricted stock worth a nominal amount, it virtually always makes sense to file one.  However, what if instead of receiving 100,000 shares of restricted stock worth $.01 per share, you received 100,000 shares of restricted stock worth $1.00 per share?  Filing a Section 83(b) election would immediately cause you tens of thousands of dollars of tax.  And if the company subsequently fails, and in particular if it fails before your stock vests, or if you end up forfeiting unvested shares, you likely would have been economically better off to not have filed a Section 83(b) election.

Bottom line – discuss with your individual tax advisor, but remember that the filing must be made (if at all) within 30 days after the grant date of your restricted stock, as that is an absolute deadline that cannot be cured.  And note that the grant date of your restricted stock is usually the date the board approves the grant, even if you don’t receive the restricted stock paperwork until later – so sometimes you need to act fast in making this decision and filing the correct paperwork.

Instructions for Filing a Section 83(b) Election

The instructions below are intended for individual US-based purchasers  based on regulations issued in July 2016 and further updates by the IRS regarding the allowance of digital and electronic signatures. You should contact your tax professional to review your Section 83(b) election before filing with the IRS. Other purchasers, including corporate or trust purchasers, should contact legal and tax professionals licensed in their jurisdiction.

Please note that the election must be filed with the IRS within 30 days of the date of your restricted stock grant .  Failure to file within that time will render the election void and you may recognize ordinary taxable income as your vesting restrictions lapse.

• Make three copies of the completed and signed election form and one copy of the IRS cover letter. The signature on the election form may be a handwritten signature or an electronic or digital signature.
• Send the completed and signed election form and cover letter, the copy of the cover letter, and a self-addressed stamped return envelope to the Internal Revenue Service Center where you would otherwise file your tax return.  Even if an address for an Internal Revenue Service Center is already included in the forms below, it is your obligation to verify such address.  This can be done by searching for the term “where to file” on www.irs.gov or by calling 1 (800) 829-1040. Sending the election via certified mail, requesting a return receipt, with the certified mail number written on the cover letter is also recommended. If you are signing the election form by hand, be sure to send the original signed form to the IRS. An 83(b) election will generally be considered timely filed if the completed election is placed in a properly addressed and stamped envelope and sent via certified U.S. mail and the certification date is on or before the 30-day deadline. Note that the IRS does not always respond with confirmation of receipt, but if the mailing was timely and properly sent as noted above, and you retain the certification and a copy of the election for your records, that generally provides sufficient evidence that the 83(b) election was timely filed.
• Deliver one copy of the completed election form to the Company.
• Applicable state law may require that you attach a copy of the completed election form to your state personal income tax return(s) when you file it for the year (assuming you file a state personal income tax return). Please consult your personal tax advisor(s) to determine whether or not a copy of this Section 83(b) election should be filed with your state personal income tax return(s).
• Retain one copy of the completed election form for your personal permanent records.

Note: an additional copy of the completed election form must be delivered to the transferee (recipient) of the property if the service provider and the transferee are not the same person.

A video on this topic is available on Cooley’s Taxplaining page .

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