What is an 83(b) Election?

You have incorporated your new company. You have assigned shares to yourself and your cofounders. You likely set up a vesting schedule to ensure everyone stays committed for the long haul.

Then someone mentions the IRS.

Specifically, they mention a weird code called the 83(b) election. This is one of the very few pieces of administrative paperwork that can cost a founder millions of dollars if missed. It is not complex, but it is strict.

Understanding this tax filing is critical for anyone holding stock subject to vesting.

The 83(b) election is a provision under the Internal Revenue Code. It allows a founder or employee to notify the IRS that they wish to be taxed on their equity immediately upon receipt, rather than waiting for the shares to vest.

This seems counterintuitive. Why would you want to pay taxes earlier than necessary?

The answer lies in the valuation. When you first start a company, your shares are practically worthless. They might be valued at a fraction of a penny per share. If you choose to be taxed now, the taxable income is negligible.

If you wait, the IRS default rules apply. Under default rules, you owe income tax on the difference between the price you paid and the fair market value every time a chunk of shares vests.

Let us look at the math to see why this matters.

Imagine you get 1,000,000 shares subject to vesting. Today, the value is $0.0001 per share. The total value is $100.

If you file an 83(b) election, you report that $100 as income this year. You pay a small amount of tax. As the shares vest over the next four years, you owe zero additional income tax, even if the stock price goes to $10 or $100 per share.

Now look at the scenario without the election.

You do not file. One year later, 25% of your shares vest. The company is doing well and the shares are now worth $1.00 each. You just vested 250,000 shares worth $250,000.

The IRS views that $250,000 as ordinary income. You owe income tax on that amount immediately, even though you have not sold the stock and have no cash to pay the bill. This happens every time more shares vest.

This filing converts future income tax liability into capital gains tax liability. It effectively locks in your cost basis at the very beginning.

However, there are unknowns you must consider.

If you file the election and pay taxes on the value of the stock, and the company subsequently goes bankrupt, you cannot claim a refund for the taxes paid. You have paid the IRS for stock that became worthless.

For most early-stage founders, this risk is low because the initial tax bill is usually nominal. But for employees joining later when the valuation is higher, the upfront tax bill could be substantial. You have to ask yourself if you have the cash on hand to cover the tax bill today for a payoff that might not happen.

There is one rule you cannot ignore.

You must file the 83(b) election with the IRS within 30 days of receiving the stock.

There is no grace period. There is no fix if you miss it. If you mail it on day 31, the opportunity is gone forever.

Founders should send this via certified mail with a return receipt requested. You need absolute proof that you filed it on time. Keep a copy in your permanent records because the IRS may ask for proof years later when you exit the company.