83(b) election: what startup founders should know

What is an 83(b) election?

When you receive stock that vests over time, the tax rules normally treat each slice as income when it vests, measured by the slice’s value on that date minus anything you paid for it. If the company’s value grows, each later slice is taxed at a higher value.

An 83(b) election, named for Section 83(b) of the Internal Revenue Code, moves that moment to the day you receive the shares. You report the value of all the shares on that day, minus what you paid, as income once. After that, vesting doesn’t create more income. When you eventually sell, the gain is taxed under the rules for selling stock.

An 83(b) election also starts your holding period on the date the shares are issued, rather than on each vesting date. That date matters for how gain is taxed when you eventually sell, including the holding period for qualified small business stock (QSBS). Your tax advisor can explain how it applies to you.

How does it work in practice?

A founder who pays fair market value. A founder buys 4,000,000 shares at $0.00001 per share, paying $40, the fair market value at formation. The shares vest over four years. With an 83(b), the founder reports $40 of value minus $40 paid, which is $0 of income. Without it, the founder reports income each time shares vest, based on their value then. Suppose the company raises a seed round and a 409A valuation then puts the common stock at $0.50 a share. When the first 1,000,000 shares vest at the one-year cliff, the founder reports about $500,000 of income for that year, on shares they can’t sell, and more with every monthly vesting after that. That is the problem the election exists to avoid.

An early employee or advisor who pays nothing. An advisor receives 100,000 restricted shares worth $0.01 each and pays nothing. With an 83(b), the advisor reports $1,000 of income in the year the shares are issued. Without it, the advisor reports income as each slice vests, at whatever the shares are worth then.

How do I file an 83(b) election?

• Fill out IRS Form 15620 (Section 83(b) Election), or the election letter your company provides. Either is accepted. List every share that is unvested on the issuance date, the date of issuance, the fair market value and the price you paid.
• File within 30 days of the date the shares are issued, either online through the IRS website, signing in with ID.me, which gives you a confirmation right away, or by certified mail, return receipt requested, to the IRS office where you file your personal tax return. The postmark date counts as the filing date. Use one method, not both.
• Keep proof: the online confirmation or the certified mail receipt, plus a copy of what you filed.
• Give a copy to the company for its records. You no longer need to attach a copy to your federal tax return. Ask your tax advisor whether your state wants one with your state return.

If day 30 falls on a weekend or federal holiday, the deadline moves to the next business day.

Who can file an 83(b) election?

• Founders receiving restricted stock under a stock purchase agreement.
• Employees and advisors receiving restricted stock, including stock with milestone-based vesting.
• Option holders who early exercise unvested options. See Early Exercisable Stock Options.

It doesn’t apply to ordinary stock options you haven’t exercised, or to RSUs, which aren’t stock until they settle. Shares that are fully vested when you receive them don’t need one.

What are the risks?

• You may pay tax up front on value you never receive. If you report income at issuance and the shares later lose value, or you leave and the company buys back your unvested shares, you don’t get that tax back.
• It can’t be undone. Once filed, the election generally can’t be revoked.

When the income reported at issuance is zero, as it is for most founders who pay full value at formation, these risks are small. When the shares already have meaningful value, the decision deserves more thought.

What if I miss the 30-day deadline?

The IRS doesn’t accept late elections, and there’s no extension. If you’re close to day 30, file online the same day or mail it by certified mail that day. If the deadline has passed, talk to your lawyer and tax advisor.

Common mistakes

• Counting 30 days from the wrong date. The clock runs from the date the shares are issued to you, not from when you signed the offer letter or term sheet, and not from when the countersigned paperwork reaches you. If the shares were issued weeks before you see the documents, you have less time than you think.
• Listing the wrong number of shares. The election must cover every share that is unvested on the issuance date. If it doesn’t match your stock purchase agreement, correct it and refile before day 30.
• Assuming someone else filed it. Formation services and companies often prepare the election, but it’s your filing. Get your own confirmation or certified mail receipt.
• Not giving the company a copy.

See our Stock Grant service.