do you need a cover letter for 83b 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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How To File 83(b) Election With The IRS

In the last five years I have helped almost 150 founders through the incorporation process. Time and time again I keep seeing one step of that process, create mass confusion for founders and early employees. Filing the 83(b) Election with the IRS within 30 days of receiving a stock grant or stock options.

I will keep it short on why you might want to file a 83(b) Election with the IRS and focus more on how to file it, since that is likely why you are reading this. This article from Cooley Law does a pretty good job explaining in much greater detail why making an 83(b) Election with the IRS can be beneficial, as well as this explanation from Wealthfront .

In short, an 83(b) election means you will be taxed on the value of your stock at the time of the grant , rather than as it vests . For founders & early employee’s of new company’s, whose stock is usually priced at $0.0001 per share at incorporation, it can make a lot of logical sense to pay upfront tax while the price of the company is still very low. Now on to the how to file your 83(b) election instructions.

IMPORTANT 83(b) Election Deadline: You must file your 83(b) Election with the IRS within 30 days of receiving your stock grant or stock options! The filing is officially deemed to have been made on the date the 83(b) is mailed from the post office; i.e. the postmark date.

If your stock is not subject to vesting, then you can ignore this process and move on with your day. 83(b) Elections are not required for those without a vesting schedule.

Steps To File Your 83(b) Election

Start with gathering the required 83(b) form documents:

If your lawyer has provided you with 83(b) election forms you may use those. If not, then print four copies of page 9 from the 83(b) Election IRS form here .

You also need to include a cover letter to the IRS, a template of which can be found here: IRS Cover Letter Template .

Complete and review all four copies of the 83(b) election form, review, date, manually sign and insert the taxpayer identification number for the taxpayer (and spouse, if applicable).

Look up where to send the completed forms by finding your state on the "Where to File Paper Tax Returns With or Without a Payment” page of the IRS website.

Enclose the following in an envelope to be mailed:

Two copies of your completed 83(b) election.

Completed cover letter.

A return self addressed envelope with stamps. The IRS will keep the first copy of your election and stamp the second copy. The self addressed envelope will be used to mail back to you the second stamped copy of your election, so you can keep it on file in your records.

Mail the enclosed envelope with 2 completed copies of your 83(b) election & cover letter to the IRS via USPS certified mail and request a return receipt.

Send another completed 83(b) election to your company.

Keep another completed 83(b) election for your personal records.

Thats it! Be on the lookout in the mail to receive that second stamped copy back from the IRS. And as always, be sure to keep your records someplace safe like a fireproof lock box.

Other Founder Guides you might find helpful:

How To Send Monthly Updates To Investors 

How To Pay Delaware Corporation Taxes

Disclaimer: I offer this post only as helpful guidance as I am not a lawyer or certified accountant. You should still research on your own and consult your accountant or lawyer if you are uncertain of the process.

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83(b) Election: Why and When to File

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Taxes are like chores. You pay what you have to, but no more than you need to.

One way to avoid overpaying is understanding the tax code and its various provisions. This can be especially true if you have a complicated tax situation, as employees or company founders with equity compensation often do. Taking advantage of the 83(b) election can help you minimize your tax outlay.

via Zoe Financial

What is the 83(b) election?

When making an 83(b) election, you request that the IRS recognize income and levy income taxes on the acquisition of company shares when granted, rather than later upon vesting. The grant date is when an employee receives a company stock or stock option award. Vesting means an employee has earned actual ownership of the company shares or stock options, usually by satisfying a certain time period of employment.

Making an 83(b) election means that you’re able to pay income taxes earlier, often before your company shares have had the opportunity to appreciate in value. If and when you sell shares for a gain down the road, you’d only be responsible for capital gains taxes as opposed to ordinary income taxes , which are taxed at a higher rate.

Holding shares for over a year prior to selling means you’d pay the more favorable long-term capital gains taxes. Filing an 83(b) also means you can start the holding period clock earlier, right after the grant date, so any capital gains accrued are eligible for the lower capital gains tax rate.

» Want to cut taxes? Explore strategies to reduce capital gains taxes

The 83(b) election can come in handy when you expect to stay with your company for the long term (since you’ll need to wait until your company shares vest to gain actual ownership), and if you expect that the value of your company shares will grow over time.

On the flip side, you could end up prepaying unnecessary taxes if you part ways with your company and never receive ownership of those company shares, or if the value of those shares decreases instead.

Who might file an 83(b) election and why

There are a few situations in which you might file an 83(b) election. If you happen to fall into either of these camps, an 83(b) election could potentially help reduce your tax burden.

Stock option holders: If you’re able to exercise your stock options early (prior to vesting), you could elect to do so and file an 83(b) election within 30 days of exercise. This way, you can potentially minimize your future tax liability if the share price of your company happens to take off.

Startup founders: In some companies, particularly startup companies, compensation for company founders or owners may include a significant amount of restricted stock (not to be confused with restricted stock units or RSUs ). Restricted stock refers to company shares that are subject to certain stipulations, such as vesting and/or forfeiture (losing your shares if you leave the company). Key employees may be awarded a handsome quantity of restricted shares that could significantly increase in value from granting to vesting. Using the 83(b) election allows these employees the chance to save by shifting their tax treatment from ordinary income taxes to capital gains taxes.

» Want to invest in startups? Learn about angel investing

When and how to file an 83(b) election

It is critical to remember to file your 83(b) election within 30 days of being granted restricted shares or within 30 days of exercising your options early. Not doing so results in your company shares being taxed upon vesting as ordinary income. But keep in mind that filing an 83(b) election is usually irreversible, so carefully consider whether you want to do so.

How to file an 83(b) election form

Though there are benefits and drawbacks to consider when deciding whether to file an 83(b) election, the process itself is fairly straightforward.

The employee completes and signs an IRS Section 83(b) form or letter that details certain key information:

Personal identifying information (name, address, Social Security number).

Description of the property awarded (number and type of shares of which company) along with the date received or purchased, any restrictions your shares are subject to and the fair market value of the shares on the date received or purchased.

The amount paid for the company shares.

The amount the employee will indicate as gross income on their income tax return.

The employee mails the election form or letter to their IRS Service Center and provides a copy to their employer.

Best practice is to send your election form through certified mail with a return receipt in case you need to prove that it was sent by a particular date.

If you’re not sure whether the 83(b) fits with your needs, consulting with a seasoned tax or financial advisor can help you decide whether it makes sense to move forward.

» Want a second opinion? A wealth advisor may prove useful for you

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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.

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!

• Last Modified
• February 5, 2024

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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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What Is the 83(b) Election?

Understanding the 83(b) election.

• Tax Strategy

The Bottom Line

• Small Business
• Small Business Taxes

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.

The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.

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 which 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.

Example of an 83(b) Election

For example, 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.

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 5-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, ten 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.

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.

When Is It Detrimental to File 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 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. " Internal Revenue Bulletin: 2016-33 ."

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 ."

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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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, Arizona, California, Colorado, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Washington, Wisconsin, or Wyoming, send your form to Department of the Treasury, Internal Revenue Service, Fresno, CA 93888-0002 .
• 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. 

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

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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How To Do an 83(b) Election

By AJ Ayers, CFP®, EA, CEP

Reader, I have failed you. I could not come up with a clever analogy for an 83(b) election. This elusive and often misunderstood tax rule is straightforward, but due to its extremely tight deadlines, is feared by many.

In its simplest terms, an 83(b) election is a declaration to the IRS that you would like to pay taxes NOW on shares in a company that may go up in value in the future. An 83(b) election literally freezes the taxes and fixes the amount of income that may or may not show up on your tax return. Remember, anytime you receive payment for work you did, the IRS will collect tax on that income. In this case - the difference in price between the grant price of stock or options issued to founders and the current fair market value (often referred to as the spread) of that stock is taxable income.

In other words: ask the IRS to get taxed on your shares when the company is practically worthless (because it hasn’t been built yet) and only pay capital gains taxes on those shares when you sell them in the future.

Most shares in a company, whether issued by the founders to themselves, or to employees later as part of an employee ownership stock plan, are subject to some sort of vesting schedule.

Vesting means that you receive shares over time as long as certain conditions are met. The most common condition is that you still work at the company.

When a company is formed, shares are often issued to the owners at a minuscule value of say, $0.001 per share. If a founder gets 1,000,000 of those shares, they would recognize income of $1,000.

Why Vesting?

Imagine there are three co-founders of a software company, and they own the company exactly equally – in our example, there are 3 million shares. For some reason, they did not put a vesting schedule in place and all of their stock vested immediately. They each pay tax on $1,000 of income (no problem) for their 1 million shares. Now let’s say founder A decides that she doesn’t want to work at the company anymore, let’s say her parent passed away and she feels an obligation to go run the family business. Now that’s obviously very sad and we wish her all the best, except now we have two founders who are working 80- hour work weeks to get this company off the ground and founder A is no longer involved at all. Now they must hire someone to replace founder A who left, and by the way still very much legally and rightfully owns 1/3rd of the company. That’s why we have vesting schedules folks.

Now let’s take that same example above but put in a vesting schedule – meaning that the owners can only actually receive the shares of stock at predetermined times as long as they meet the requirement that they still work at the company.

Let’s assume a simplified 4-year vesting schedule – meaning 1/4th of the shares vest at the one-year anniversary of the grant, 2 year anniversary, and so on. So, employee A bailed six months in and didn’t get squat.

Employees B and C are there to receive their shares on their one-year anniversary and they are stoked. They each get 1/4th of their 1,000,000 shares – so 250,000 shares apiece. So they should just have to pay tax on $250 (250,000 shares times the minuscule par value of $0.001 per share)  EXCEPT ONE PROBLEM: this software company is legit and attracted the attention of a major VC firm who already valued their IP at $10 million dollars which means that those 3 million shares have increased in value to $3.33. That’s great news, except now as their shares vest, the IRS wants them to be taxed at the Fair Market Value. This means founders B and C now have a major tax problem: $832,500 (250,000 shares x $3.33) is going to be taxed at ordinary income tax rates (as high as 37%).

How could they have avoided this?

A timely filed 83(b) election would have saved them oh I don’t know (37% x $832,500) $308,025 in taxes. And that’s just the first of 4 vesting events!

So an 83(b) election can often be essential for founders or executives. However, it doesn’t always make sense. In our example, the tax burden at the time the 83(b) election was filed was almost a rounding error because the share value was so low at grant so it’s almost a no-brainer. But we often see scenarios where an executive may be issued restricted stock when the company is already mature, and therefore making an 83(b) election would result in a large tax bill all at once with a substantial risk of the stock never appreciating. Once you pay all that tax, you can’t get it back.

83(b) elections are typically used by early founders or employees who are granted shares of restricted stock that vest over time (NOT RESTRICTED STOCK UNITS OR RSUs).

Why can’t you do an 83(b) election on Restricted Stock Units? Well because you don’t actually get anything until the vesting commences and the IRS says you don’t have to pay taxes on anything you don’t actually own yet. Whereas with Restricted Sock, or Restricted Stock Awards, you do receive all the shares at grant, the restricted part is that you have to meet those pesky conditions and vesting schedule in the future.

How to actually file an 83(b) election

So unfortunately there isn’t an elegant form to fill out or an easy portal to submit online. You’ll actually need to mail a letter to the IRS. There’s no template, you just kinda…do it.

I’ve seen my fair share of 83(b) elections over the years and I always chuckle at how janky and insignificant they seem. It’s just a piece of paper (sometimes it’s handwritten!) but the tax savings can be eye-popping.

The most important part of all of this is that an 83(b) election must be made within 30 days of the grant of restricted stock. No exceptions. If you don’t meet the 30-day deadline, all you have done is accelerated your payment for the stock and the tax will instead be due at each vesting event.

If you’re a founder working with a law firm, chances are your lawyers and tax advisors have told you about the 83(b) election and have maybe even provided a form for you to complete and mail into the IRS.

Step 1: write your 83(b) election. (I think this template is helpful)

Step 2: Mail it to the correct IRS processing office depending on your state. The best practice is to include TWO copies of the letter with a cover letter and a self-addressed and stamped return envelope so the IRS can mail back proof of your 83(b) election.

Are there any downsides?

Of course! Accelerating the tax you owe on shares at a private company is very risky. The company could file for bankruptcy and you could be caught with a tax bill and worthless shares. You could also be fired for cause, meaning you won’t be able to meet the vesting requirements.

What About ISOs? Can you file an 83(b) election for Incentive Stock Options?

You can! This is a new and slightly grey area of the tax code but it’s perfectly legal. When you have a grant of Incentive Stock Options (ISOs) and your company has a written stock plan that allows for something called an Early Exercise, you may utilize an 83(b) election to pay taxes now.

With ISOs, instead of paying taxes on ordinary income when you decide to exercise the shares, your spread between the grant price and fair market value is actually taxed at Alternative Minimum Taxable rates. This strategy is popular with new hires who want to pay all their AMT tax now to not have to worry about large appreciation later.

Imagine this: you just got hired at a software company and are granted 100,000 ISO shares with a 4-year vesting schedule. Now, typically you would have to wait for that vesting schedule to play out - meaning you work at the company for 4 years before you could exercise all of your shares. But if this company’s stock plan allows for an early exercise, then you could exercise ALL of your shares now, file an 83(b) election and freeze the AMT. This could be a glorious tax-saving move if we imagine that the current grant price is exactly equal to the current fair market value of the stock. Say the grant price is $.50 per share and you’ve just been granted the shares - well the company probably hasn’t had a new valuation so the fair market value is also $.50 per share. If you decided to early exercise, you would of course have to pay the strike price of $.50 for your 100,000 shares, meaning you’d have to come up with $50,000 cash, BUT you would pay no tax at all because there’s no spread! So while technically there is AMT due, there’s no difference between your grant price and the fair market value so there’s no income for the IRS to tax. Now you own 100,000 shares and will only have to pay capital gains taxes on appreciation above $.50, assuming you meet the right holding periods of one year from exercise and two years from grant.

But it’s important to remember the 30-day rule here as well, but it’s slightly different. With Restricted Stock as you read above, you have 30 days from the grant to file the 83(b) election, but with ISOs you have 30 days from EXERCISE to file your 83(b) election using the same process detailed above.

An 83(b) election can be a fantastic way to save on taxes, except that it won’t always work out in your favor. Let’s say that your company never goes anywhere any you did end up paying some AMT at early exercise. Well, you’d be out of luck.

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Irs simplifies section 83(b) election process for shareholders.

What is the Section 83(b) Election Process?

The Section 83(b) Election Process can be a little tricky, so let’s start at the beginning.

Under Section 83(b) of the Internal Revenue Code (“Section 83(b)”), a taxpayer who receives certain property subject to vesting as compensation for services (for example, a restricted stock award granted by the taxpayer’s employer) may elect to include in gross income the fair market value of the property at the time of the transfer over the amount (if any) paid for the property (an “83(b) election”). If an 83(b) election is made, the taxpayer recognizes income on the property in the year of the transfer, rather than in a potentially later year when the property becomes vested.

In summary, a Section 83(b) election is a letter a taxpayer sends to the Internal Revenue Service (“IRS”) letting the IRS know you would like to be taxed on your shares of restricted stock on the date you were granted equity rather than on the date the equity vests.  This issue comes up time and time again in stock option plans for startup companies or companies that recently had an initial public offering (“IPO”).

Section 83(b) elections are applicable to stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant.

This election allows you to be taxed at the preferential capital gains tax rate rather than the ordinary income rates.

This can be a major tax savings. The maximum ordinary income tax rate in 2016 is 39.6%, whereas the maximum long-term capital gains rate in 2016 is 20%. Because the United States uses a progressive system with graduated tax rates (meaning the rates vary based on your income), you may actually be subject to lower ordinary income rates, but if you make more than $37,650 in a year then the long-term capital gains rate will certainly 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.

In a startup company, this distinction can be a major tax savings for an individual because often the difference in the stock price between a few years can be substantial.

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. Thus, the earlier you file your 83(b) election, the more of the gain that can be shifted to long-term capital gains tax rates.

83(b) Election Examples

In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $0.01 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.

These Section 83(b) election process examples are right out of the treasury regulations promulgated by the IRS.

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 $396.00 (i.e., $1,000 x 39.6%). Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the later sale. On the later sale that 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 $0.01 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? $399,804 (i.e., $500,000 minus $396 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 $39,600. On the later sale that 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? $380,400 (i.e., $500,000 minus $39,600 minus $80,000).

So in the above example, filing a Section 83(b) election would have saved you $19,404 . Filing a Section 83(b) election also has two other benefits. It would have prevented you from having a $39,600 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 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.

Why doesn’t everyone file one? If you receive restricted stock even if it is 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 $0.01 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.

So if you have faith in your company, file the 83(b) election.

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 be super efficient about making this decision and filing the correct paperwork.

Here is a tip: send TWO COPIES of the Section 83(b) election form along with a self-addressed stamped envelope. Then the IRS will file-stamp one of them and send it back to you. They don’t send your original form back to you and if they lose it then there is no proof that you filed one on time. That’s why we always file two of them with a SASE.

HOW THE IRS JUST MADE IT EASIER TO FILE An 83(b) ELECTION

Until now, you were required to file an 83(b) election with your tax return the year in which the property was transferred. But guess what?!! TurboTax and some other electronic filing systems do not have this 83(b) feature built in to their system sometimes, so it was always very difficult to file these 83(b) forms. Thank you IRS for making this step of the Section 83(b) election process easier.

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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.

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• Stock options
• Exercising stock options

How and when to file an 83(b) election

There can be significant tax benefits to exercising stock options before they vest. But if you are exercising early, you’ll need to file an 83(b) election with the IRS to make it official.

An 83(b) election is a one-page document that lets the IRS know you’re going to exercise early and accelerates the tax treatment of those options, allowing you to pay taxes on the current value of your as-yet-unvested shares, rather than their value once they fully vest.

Essentially, you’re agreeing to pay your taxes early based on your belief that when your options vest they will be worth more, or that tax rates will be higher. You need to file an 83(b) within 30 days of exercising your options, or you run the risk of the IRS not treating the stock options as exercised early.

Filing an 83(b)

The process of filing an 83(b) election is relatively straightforward:

• Step 1: Download an 83(b) form. Your company likely gave you one along with your offer documents. If not, ask your company’s finance team if they have a template you can use. Alternatively, stock option administration platforms, like Carta or Shareworks, offer 83(b) templates when you exercise early.
• Step 2: Fill out the form with information about the stock options you want to exercise.
• Step 3: Send the form to the IRS and give a copy to your company within 30 days of exercising your stock options. For your records, include an additional copy of the form, a postage-paid return envelope, and a letter stating that you want the copy to be date stamped upon receipt.

The benefits of exercising early

Not all companies allow employees to exercise their options early. However, if your employer does, there can be significant tax savings to going this route, especially if your strike price and the company’s fair market value (FMV) valuation is still relatively close.

Exercising early means you’ll pay income taxes on the current market value of the stock. You’ll also start the clock toward long-term capital gains tax rates — which you’ll qualify for if you hold the shares for at least one year after exercising (in the case of both non-qualified stock options and incentive stock options), and at least two years after they were originally granted (in the case of incentive stock options).

The drawbacks of exercising early

It’s important to understand the risks involved with exercising your options early. If the company declines in value, you could fail to recoup your investment. In addition, if you decide to leave your job before all of your early-exercised shares vest, many companies reserve the right to “claw back” any unvested shares you exercised early, buying them back from you at their strike price.

Understanding the costs

While exercising early can reduce your taxes in the long-term, you’ll still face upfront expenses, including the cost of exercising and any potential associated taxes.

Not sure how much exercising early could cost you? Our Stock Option Tax Calculator breaks down how much you would owe in taxes if you exercised now — and how that amount could change over time.

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Home > Finance > How To File Form 83B With The IRS

How To File Form 83B With The IRS

Modified: February 21, 2024

Learn how to file Form 83B with the IRS for financial transactions and maximize your tax benefits. Simplify the process of reporting stock options and enhance your overall financial management.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, what is form 83b, why is form 83b important, when should form 83b be filed, steps to file form 83b with the irs, step 1: obtain form 83b, step 2: fill out the personal information section, step 3: provide the details of the election, step 4: attach the declaration statement, step 5: submit the form to the irs.

Welcome to our comprehensive guide on how to file Form 83B with the IRS. Form 83B is a vital document that holds great significance for individuals who receive restricted stock grants or options as part of their compensation packages. It allows them to elect to include the value of the stock in their taxable income at the time of grant, rather than at the time of vesting.

Understanding the complexities of tax forms can be daunting, but filing Form 83B correctly is crucial to avoid potential tax pitfalls and maximize your tax benefits. In this article, we will break down the process of filing Form 83B with step-by-step instructions to ensure you navigate this form smoothly and accurately.

Before we delve into the filing process, let’s explore what Form 83B is, why it is important, and when it should be filed. By gaining a clear understanding of these key aspects, you will be better equipped to navigate the filing process and make informed decisions regarding your stock compensation.

Form 83B, also known as the “Election by a Shareholder of a Corporation with Respect to the Restricted Stock”, is a tax form used to notify the Internal Revenue Service (IRS) of your election to include the value of restricted stock grants or options as part of your taxable income.

When you receive restricted stock grants or options, there is typically a vesting period during which you must wait before you can fully own or exercise them. The value of the stock is determined at the time of grant, and without filing Form 83B, you would be required to recognize the income at the time the stock vests and becomes transferable or not subject to substantial risk of forfeiture.

Filing Form 83B allows you to make an election under Section 83(b) of the Internal Revenue Code to include the value of the stock in your taxable income at the time of grant rather than at the time of vesting. This election carries significant implications for your tax liability and can have both advantages and disadvantages depending on your individual circumstances.

By filing Form 83B, you accelerate the recognition of income, which means that any future increase in the value of the stock will be subject to capital gains tax rates rather than ordinary income tax rates. This can provide tax benefits, especially if you anticipate a significant increase in the value of the stock over time.

It is important to note that filing Form 83B is not applicable to all types of stock compensation. It is specifically used for restricted stock grants and options that have a substantial risk of forfeiture. Other forms of stock compensation, such as non-qualified stock options or restricted stock units (RSUs), have their own separate tax treatment and do not require the filing of Form 83B.

Now that we have covered the basics of Form 83B, let’s dive into why this form is important and the advantages it offers to shareholders.

Form 83B holds significant importance for individuals who receive restricted stock grants or options as part of their compensation. Here are several key reasons why filing Form 83B is crucial:

• Tax Benefits: By filing Form 83B, you have the opportunity to include the value of the stock in your taxable income at the time of grant rather than at the time of vesting. This can result in potential tax savings, as any future increase in the stock’s value will be subject to capital gains tax rates instead of ordinary income tax rates. This advantageous tax treatment can make a significant difference, especially if the stock’s value appreciates substantially over time.
• Timing: Filing Form 83B must be done within a specific timeframe. The election must be filed with the IRS either within 30 days of receiving the stock grant or within 30 days of exercising the stock options. Failing to file within this window could result in missed opportunities for tax benefits and may subject you to unfavorable tax consequences.
• Risk Management: Restricted stock grants or options come with a level of risk. By filing Form 83B and including the value of the stock in your taxable income upfront, you mitigate the risk of potentially losing the stock’s value in the future. If the stock were to decline significantly in value after vesting, you would have already paid tax on the initial grant value, reducing the potential tax liability.
• Ownership Rights: Filing Form 83B can expedite your ownership rights in the stock. Once the election is made and accepted by the IRS, you are treated as the owner of the stock for tax purposes. This means you will have the ability to sell or transfer the stock without any further tax consequences, subject to any lock-up or holding period restrictions imposed by your company.
• Strategic Financial Planning: Filing Form 83B requires careful consideration and analysis of your financial situation. It provides an opportunity to strategically plan your tax obligations and manage your overall financial portfolio. By working with a tax professional or financial advisor, you can maximize the advantages offered by filing Form 83B and ensure it aligns with your long-term financial goals.

Now that we understand the importance of Form 83B, let’s explore when you should file this form with the IRS.

Filing Form 83B with the IRS is time-sensitive, and it is crucial to adhere to the specific filing requirements and timelines. Here are the key instances when Form 83B should be filed:

• Within 30 Days of Grant: If you receive restricted stock grants, you must file Form 83B within 30 days of the date of grant. The clock starts ticking from the moment you acquire a substantial interest in the stock, even if it is subject to a vesting schedule.
• Within 30 Days of Exercising Stock Options: If you have stock options that you exercise, the 30-day filing window also applies. Form 83B should be filed within 30 days of the date you exercise your options.

It is vital to note that Form 83B cannot be filed after the deadline has passed. Late filings will not be accepted by the IRS, and failure to file within the designated timeframe can have significant tax consequences.

When considering whether to file Form 83B, you must carefully evaluate your individual financial circumstances, the potential future value of the stock, and any possible tax implications. It is recommended to consult with a tax professional or financial advisor for guidance to ensure compliance with the filing requirements and make informed decisions.

Now that we understand when Form 83B should be filed, let’s proceed with the step-by-step instructions on how to file this important form with the IRS.

Filing Form 83B with the IRS may initially appear overwhelming, but by following these step-by-step instructions, you can navigate the process with ease. Here is a breakdown of the essential steps:

• Step 1: Obtain Form 83B: You can download Form 83B from the official IRS website (irs.gov) or obtain a copy from your employer’s human resources department. Make sure you have the most recent version of the form.
• Step 2: Fill out the Personal Information Section: Provide your personal details, including your name, address, and social security number. Ensure accuracy when entering this information as any errors could delay the processing of your form.
• Step 3: Provide the Details of the Election: In this section, you will need to include specific details about the restricted stock grants or options. Fill out the applicable fields, such as the date of the grant or exercise, the total number of shares, and the fair market value of the stock at the time of grant.
• Step 4: Attach the Declaration Statement: Form 83B includes a declaration statement that you must sign and date. By signing the declaration, you affirm that you are making an election under Section 83(b) of the Internal Revenue Code and that the information provided is accurate to the best of your knowledge.
• Step 5: Submit the Form to the IRS: Once you have completed the form and attached the declaration statement, make a copy for your records and mail the original to the IRS. It is highly recommended to send the form via certified mail or a similar trackable method to ensure delivery confirmation.

It is essential to keep in mind the strict filing deadlines. Make sure to submit Form 83B within 30 days of the stock grant or exercise of options. Late submissions are not accepted by the IRS, and missing the deadline can result in unfavorable tax consequences.

Remember, filing Form 83B is a critical step in managing your tax obligations and maximizing the potential tax benefits of your restricted stock grants or options. If you have any uncertainties or complex tax situations, consult with a tax professional to ensure compliance with the filing requirements and make informed decisions.

Now that we have covered the steps of filing Form 83B, we can conclude this guide with a summary of the importance of this form.

The first step in filing Form 83B with the IRS is to obtain the form itself. You have a few options for obtaining Form 83B:

• IRS Website: The easiest and most convenient way to obtain Form 83B is by visiting the official website of the Internal Revenue Service (IRS) at irs.gov. They provide a wide range of tax forms, including Form 83B. Simply search for “Form 83B” in the search bar, and you should be able to find and download the latest version of the form.
• Employer’s Human Resources Department: If you receive restricted stock grants or options through your employer, they may provide you with a copy of Form 83B. Reach out to your company’s human resources department to inquire about obtaining the form.
• Tax Software or Service: If you use tax preparation software or hire a professional tax service, they should have Form 83B available for you to use. Check within the software or consult with your tax service provider to ensure you have access to the necessary forms.

Make sure that you obtain the most recent version of Form 83B, as the IRS may update the form periodically to reflect any changes in tax regulations or requirements. Using an outdated form could result in your filing being rejected or delayed.

Once you have obtained Form 83B, either in a printable format or through electronic means, you can proceed to the next step of filling out the necessary information. In step 2, we will guide you through filling out the personal information section of the form.

It is important to note that although obtaining the form is the first step, you should familiarize yourself with the overall process and requirements of filing Form 83B. Understanding the purpose of the form and the significance of timely filing will help ensure a smooth and accurate submission to the IRS.

Now that you have obtained Form 83B, let’s move on to step 2: filling out the personal information section of the form.

After obtaining Form 83B, the next step in filing this important tax form with the IRS is to fill out the personal information section. This section gathers essential details about you as the taxpayer. Follow these guidelines to complete this part of the form accurately:

• Name: Provide your full legal name as it appears on your tax returns. Make sure to use the same name consistently throughout your tax forms to avoid any confusion.
• Address: Enter your current mailing address. Include the street address, city, state, and ZIP code. Make sure to provide a valid and up-to-date address where you can receive correspondence from the IRS.
• Social Security Number (SSN): Provide your SSN, which serves as your unique identifier for tax purposes. Double-check that you enter the number correctly to prevent any issues or delays in processing your form.

Take your time to ensure the accuracy of the personal information you provide. Any errors or inconsistencies in this section may lead to processing delays or potential complications with your tax filing. If you have recently changed your name or address, make sure to update your records with the Social Security Administration and the IRS before filing Form 83B.

Remember to review the instructions accompanying Form 83B for any specific requirements or additional information related to the personal information section. If you have any doubts or questions, it is advisable to consult with a tax professional who can provide guidance on accurately completing this section and the overall form.

Now that you have filled out the personal information section of Form 83B, let’s proceed to step 3, where we will guide you through providing the details of the election.

After completing the personal information section of Form 83B, you will move on to providing the details of your election. This section requires you to provide specific information regarding your restricted stock grants or stock options. Follow these guidelines to accurately fill out this section:

• Date of Grant or Exercise: Enter the date of the stock grant or exercise of stock options. This is the date when you acquired a substantial interest in the stock. Make sure to reference the official grant letter or other documentation provided by your employer to ensure the accuracy of this date.
• Total Number of Shares: Indicate the total number of shares included in the grant or stock options. This information can usually be found in the grant letter or stock option agreement provided by your employer.
• Fair Market Value at the Time of Grant: Determine the fair market value of the stock on the date of the grant or exercise. Fair market value is typically the price at which the stock would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell. If you are unsure about the fair market value, consult with your employer or a qualified financial advisor.

Ensure that you accurately fill out this section with the correct information. Inconsistencies or errors in the details provided may lead to complications and potential tax issues. Take the time to review the supporting documents and consult with your employer or financial advisor if needed.

It is essential to note that the specific details required may vary based on the type of stock compensation and the applicable tax regulations in your jurisdiction. Make sure to carefully read the instructions accompanying Form 83B and consult with a tax professional or advisor if you have any questions or concerns regarding the details of the election section.

Now that you have provided the details of the election, let’s move on to step 4, where we will guide you through attaching the declaration statement to Form 83B.

Once you have completed the personal information section and provided the details of your election on Form 83B, the next step is to attach the declaration statement. The declaration statement is a crucial part of the form, as it confirms your election under Section 83(b) of the Internal Revenue Code. Here’s what you need to do:

• Review the Declaration Statement: Carefully read through the declaration statement on Form 83B. It is essential to understand the implications and responsibilities associated with making this election. Ensure that you agree with the statement and that it accurately reflects your intention to include the value of the stock in your taxable income.
• Sign and Date the Declaration Statement: On the form, you will find a designated space to sign and date the declaration statement. Sign your name exactly as it appears on the form to avoid any discrepancies. Remember that by signing the statement, you are certifying that the information provided is true and accurate.

Additionally, it is important to note that the declaration statement must be signed within the 30-day timeframe from the date of the stock grant or exercise of stock options. Late signatures will render the filing invalid, so make sure to adhere to the designated deadline.

After signing and dating the declaration statement, move on to the next step of the filing process: submitting Form 83B to the IRS.

Keep a copy of the completed and signed form, along with the attached declaration statement, for your records. This will serve as proof of your election and can be referenced in the future if needed.

Now that you have attached the declaration statement to the form, let’s proceed to step 5, where we will guide you through submitting Form 83B to the IRS.

After completing all the necessary sections and attaching the declaration statement to Form 83B, the final step is to submit the form to the Internal Revenue Service (IRS). It is crucial to ensure the timely and proper submission of the form to comply with the filing requirements. Here’s what you need to do:

• Make a Copy: Before sending the original form, make a copy for your records. Having a duplicate ensures that you have a backup in case any issues arise during the submission process or if you need to reference the form in the future.
• Submit via Mail: Mail the original Form 83B, along with any required attachments, to the IRS. It is recommended to use certified mail or a comparable method that provides proof of delivery. This way, you can track the status of the submission and have confirmation that the form reached the IRS.
• Keep a Record: Retain a record of the mailing receipt, as well as any correspondence or confirmation received from the IRS. This documentation will serve as evidence of your form submission and can be useful if any inquiries or issues arise in the future.

Ensure that you submit Form 83B within the 30-day deadline from the date of the stock grant or exercise of stock options. Late submissions will not be accepted by the IRS, potentially resulting in unfavorable tax consequences.

It is important to keep in mind that filing Form 83B with the IRS is a significant step in managing your tax obligations and maximizing the potential tax benefits of your restricted stock grants or options. If you have any uncertainties or complex tax situations, it is advisable to consult with a tax professional to ensure compliance with the filing requirements and make informed decisions.

Congratulations! You have completed the process of filing Form 83B with the IRS. By following these steps, you have taken a proactive approach to managing your tax liability and potentially maximizing your financial benefits.

Now that you have completed the submission of Form 83B, let’s conclude this guide by summarizing its importance and the advantages it offers to shareholders.

Filing Form 83B with the IRS is a critical step for individuals who receive restricted stock grants or options as part of their compensation. By electing to include the value of the stock in your taxable income at the time of grant, rather than at the time of vesting, you can potentially benefit from advantageous tax treatment and strategic financial planning.

In this comprehensive guide, we have walked you through each step of the Form 83B filing process. From obtaining the form to completing the personal information section, providing the details of the election, attaching the declaration statement, and submitting the form to the IRS, we have covered the essential aspects to ensure a smooth and accurate filing.

We emphasized the importance of timely filing and provided guidance on gathering the necessary information, understanding the implications of your election, and complying with the specific requirements of Form 83B. We also highlighted the advantages of filing Form 83B, including potential tax benefits, risk management, and strategic financial planning opportunities.

While this guide strives to provide a comprehensive overview, it is important to note that individual circumstances may vary, and tax regulations can be complex. Therefore, it is always advisable to consult with a tax professional, financial advisor, or your employer’s human resources department to ensure compliance with the specific requirements of your situation.

By filing Form 83B accurately and within the designated timeframe, you can manage your tax obligations effectively, optimize your tax benefits, mitigate risk, and strategically plan your financial future. Taking the time to understand and navigate the process will allow you to make informed decisions regarding your stock compensation and ensure compliance with IRS regulations.

Remember, the information provided in this guide is for informational purposes only and should not be considered as legal or financial advice. Consult with a qualified professional for personalized guidance based on your specific circumstances.

Now that you have a comprehensive understanding of how to file Form 83B with the IRS, you are well-equipped to take the necessary steps to maximize the benefits of your restricted stock grants or options. Good luck!

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IRS (Permanently) Allows Digital Signatures for Section 83(b) Elections

Good news ­– the IRS announced that it will allow taxpayers to make and file Section 83(b) elections with a digital signature. This decision makes permanent a practice that the IRS temporarily allowed during the COVID-19 crisis. [1]

Below, we provide a refresher of certain requirements and considerations when making a Section 83(b) election.

How are Equity Awards Generally Taxed?

In general, stock awards (and other property) given to employees or consultants are subject to income taxation when the awards are no longer subject to a “substantial risk of forfeiture.” For example, if a grant of restricted stock is subject to a vesting schedule whereby the restricted stock is forfeited if the employee leaves the company before the vesting date, that vesting schedule will constitute a substantial risk of forfeiture.

A substantial risk of forfeiture can also occur if the employee is required to sell back at a potential discount or forfeit the equity awards upon a termination of employment (or upon certain types of “bad leaver” terminations of employment), even if an award is already vested.

When an equity award is no longer subject to a substantial risk of forfeiture, the award is subject to income taxation on an amount equal to the excess of the fair market value of the property at the time the risk of forfeiture lapses minus the amount the employee paid for the property. The equity award will generally be subject to taxation at ordinary income tax rates.

What is a Section 83(b) Election?

If an employe makes a timely Section 83(b) election, then the employee will be subject to income taxation upon grant of the equity award, rather than upon the later lapse of risk of forfeiture. Although many taxpayers would not normally want to accelerate the timing of income taxation, making a Section 83(b) election can be valuable because the increase in value from grant date to the subsequent sale of the equity award will be subject to capital gains rates.

For example, assume an employee is granted a restricted stock award with a value of $10,000 in Year 1, and the award is subject to a forfeiture provision if the employee leaves before a change in control of the company. If a change in control occurs in Year 5 when the restricted stock is worth $100,000, then the employee will be subject to ordinary income taxation in Year 5 for the full $100,000 amount. However, if the employee had timely made a Section 83(b) election in Year 1 and sold the restricted stock in Year 5 on the change in control, then the $10,000 award in Year 1 would have been taxed at ordinary income rates, but the subsequent $90,000 increase in value would have been taxed at preferential capital gains rates in Year 5.

Assuming the employee was subject to an income tax rate of 37% and long-term capital gains rate of 20% in each year (and excluding other income and employment taxes, state taxes, and the time value of money), the employee would be better off on an after-tax basis if the employee made the Section 83(b) election in Year 1:

What are the Downsides to a Section 83(b) Election?

Because Section 83(b) elections accelerate the timing of income taxation, these elections are not helpful in every situation. For example, a participant should generally not file a Section 83(b) election if he or she does not believe the value of the company will substantially rise over the vesting period. In addition, a participant should generally not file a Section 83(b) election if he or she is worried that the vesting conditions will not be satisfied.

If a participant files a Section 83(b) election and then subsequently forfeits the award, the participant will not be entitled to a tax refund. The participant would have paid tax at ordinary income tax rates and would only be entitled to a capital loss upon forfeiture of the equity award. This situation may not be as relevant if a participant makes a Section 83(b) election for a profits interest award with $0 fair market value or a stock award from an early-stage company with a low valuation. But if a participant made a Section 83(b) election on a company with a substantial valuation, then this timing and character mismatch may create an unfortunate situation for the participant.

Can a Section 83(b) Election be made for all Equity Awards?

Most often, Section 83(b) elections are considered with grants of restricted stock and restricted LLC or partnership units (including grants of restricted stock that are received following an early exercise of a stock option before it is fully vested). Many taxpayers also make Section 83(b) elections with respect to grants of profit interests in an LLC (taxed as a partnership). The IRS indicated in Rev. Proc. 2001-43 that a Section 83(b) election is not required for grants that fit within the profits interest safe harbor. However, many practitioners recommend making a prophylactic Section 83(b) election upon receipt of a profits interest in case the IRS later challenges that the award does qualify as a profit interest.

Section 83(b) elections are not available for all types of equity awards, however. Options and restricted stock units [2] are generally not eligible for Section 83(b) elections. In addition, grants of phantom equity or other equity-like arrangements where no stock or equity is transferred at grant are not eligible for Section 83(b) elections.

How do I make a Section 83(b) election?

The Section 83(b) election must be made and filed with the IRS within 30 days after the equity is granted/transferred to the participant. The IRS does not allow late elections if a participant misses the 30-day deadline. This election is generally irrevocable.

The regulations under Section 83(b) require the taxpayer to provide certain information about the award:

• Name, address, and taxpayer identification number (ex: TIN/SSN)
• Description of the property (ex: number of shares or units, name of entity)
• Date of transfer of property
• Taxable year for which election is made
• Restrictions to which property is subject
• Fair Market Value of the property
• Amount paid for the property

This election must be signed, but as noted above, the IRS will now allow a digital signature for this election.

The taxpayer must timely mail the Section 83(b) election to the IRS service center where the taxpayer files their tax return. Although not required, it is common to send this election via certified mail, return receipt requested, to send a cover letter, and to send two copies of the election to the IRS with a return envelope for the IRS to return a stamped copy of the election. The IRS no longer requires an employee to attach the Section 83(b) election with the individual’s federal tax return, although it is advisable for the individual to check with their tax professional to see if a state will require it to be attached on the state income tax return. The taxpayer must also send a copy of the signed election to the taxpayer’s employer.

[1] In general, a tax return, statement, or other document (such as a Section 83(b) election) must contain a wet signature unless the IRS waives the requirement and allows for a digital signature or alternative method for signing or subscribing. See Code Section 6061. The IRS previously issued several memorandums during the COVID-19 crisis that waived the wet signature requirement for certain tax forms and for Section 83(b) elections. See Form 13016 (Rev. 2-2001) (irs.gov) . This memorandum most recently extended the date of the digital signatures for these forms until October 31, 2023. On October 17, 2023, the IRS released a new IRM noting that the IRS would accept electronic and digital signatures from certain tax forms and for the Section 83(b) election. 10.10.1 IRS Electronic Signature (e-Signature) Program | Internal Revenue Service .

[2] Restricted stock units are promises to deliver stock at a later date (commonly after they vest) and differ from restricted stock grants which transfer beneficial ownership of the stock at the time of grant subject to a risk of forfeiture (and transfer of the stock back to the employer) until they vest.

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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:

[wpforms id=”1761″ title=”false”]

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 .

Section 83(b) elections

A Section 83(b) election is a letter that lets the Internal Revenue Service (IRS) know you’d like to have your founder stock taxed at the time of your stock purchase rather than at the time of vesting. In many cases, a Section 83(b) election can save you a significant amount on your future taxes.

If you make a Section 83(b) election, most importantly, you won’t pay taxes when your stock vests. Instead, you choose to pay very little (if any at all) taxes at the time of stock purchase, and you won’t owe taxes until you actually sell your stock.

If you don’t make a Section 83(b) election, you could owe a large amount of taxes every time your stock vests, especially if the stock value has increased. You’ll also have to pay taxes when you sell your stock. For an example, see Tax impacts of a Section 83(b) election in detail .

Benefits of the Section 83(b) election for newly incorporated startups

Startup lawyers almost always recommend filing a Section 83(b) election if founders purchase their stock when the company is still at its early stage. If you recently incorporated your startup, you should consider making a Section 83(b) election for your founder’s stock if you expect your stock value to go up in the future and you plan to stay employed with your company until all of your stock vests. Not all stock is eligible for a Section 83(b) election, but if you’re incorporating your company with co-founders through Atlas, your company’s stock is eligible because it’s subject to vesting.

If you choose to not pay money for your stock, you and your company will need to pay taxes for the stock issuance. We recommend that you talk to your tax advisor if you don’t plan to pay money for your stock purchase.

Reasons not to file a Section 83(b) election

If you believe the value of your company’s stock will decrease by the time it vests, or if you think you might not be employed by your company until your stock vests, then you might not want to make a Section 83(b) election.

If you’re not a US taxpayer and don’t plan to be, there’s no benefit from making a Section 83(b) election. For more information, see Section 83(b) elections for non US residents .

Timing for Section 83(b) elections

Mail your election by no later than 30 calendar days after the stock is issued to you. There are no exceptions to this rule—this is a strict deadline.

The 30th day is calculated by counting every day (including Saturdays, Sundays, and holidays) starting with the day after the date that you’re issued the stock. For example, if you’re issued stock on April 10 that’s subject to a vesting schedule, your Section 83(b) election must be postmarked no later than May 10. If the 30th day falls on a weekend or holiday, then the deadline is the next business day.

Section 83(b) elections for non US residents

If you live outside the US but file US tax returns, you should still consider making a Section 83(b) election because the election might save you US taxes in the future.

If you don’t file US tax returns, but think you might become a US taxpayer in the future, you should still consider making a Section 83(b) election and applying for an ITIN. If you don’t make the election and later become a US taxpayer when the stock vests, you could be subject to additional US tax liability as your stock vests.

If you’re not currently, and don’t plan to become a US taxpayer, making a Section 83(b) election doesn’t matter because a Section 83(b) affects only US tax liability. For foreign filing instructions, see Filing Section 83(b) elections as a non-US founder .

How to file a Section 83(b) election

You make a Section 83(b) election by first completing and signing the Section 83(b) election form provided to you. You can download the 83(b) form and instructions. You can download the 83(b) form and instructions here .

Send the originally signed Section 83(b) election to the Internal Revenue Office with which you file your return by USPS Certified Mail with Return Receipt, within 30 days of the date of stock issuance. See the next section if you don’t have access to the USPS.

Optionally, we also recommend including a copy of the election with a self-addressed, stamped envelope when mailing the original signed election. The IRS usually returns the date-stamped copy of your election using the self-addressed envelope, which is the best (while not required) proof of having made a timely election.

Delivering your election without USPS

If you can’t access a USPS office, there are limited private delivery service alternatives that you can use to deliver your election to the IRS.

Next steps after mailing your election

Keep a copy of the signed Section 83(b) election form and the green-and-white Certified Mail Receipt (with the date stamp showing that you put it in the USPS mail within 30 days of the date of stock issuance). When the IRS mails back the date-stamped green card (and additional 83(b) election form copy if you sent one), keep those as proof of timely filing. If you’re using one of the private delivery services approved by the IRS, make sure to get a date-stamped receipt from them. We suggest taking photos of these and saving a digital version as well.

Also send a copy of the Section 83(b) election to your company. It can be as simple as emailing the photos to your company’s email address or saving them in your company’s digital folder (you can also use other methods that better suit you).

Steps to take if you didn’t retain proof of timely delivery

If you don’t retain proof of timely filing of the Section 83(b) election, it might be difficult to prove that you filed this election on time and that you should be taxed accordingly. Consult with your tax advisor for further advice in this situation.

Extending the election timeline or revoking after the election

If you fail to make a Section 83(b) election within the 30-day time period, you’re not allowed to make a late election.

After you make a Section 83(b) election, it can be revoked only under extremely limited circumstances. Specifically, the Internal Revenue Service Commissioner might consent for an election to be revoked within 60 days of the election if the election was made under a mistake of fact about the transaction.

Filing a Section 83(b) with co-founders

The Section 83(b) election is filed by an individual taxpayer, not by the company. Thus, each founder needs to make their own decision about whether to make an election and must file it for themselves. However, future investors might expect that all co-founders have filed a Section 83(b) election.

Whether to attach a copy of a Section 83(b) election income tax returns

After you mail the election to the IRS office where you regularly file your tax returns, you don’t need to submit the copy of the election again with your federal income tax returns. On your tax return, make sure you properly report your stock purchase.

Tax impact of a Section 83(b) election in detail, with an example

The election impacts when you owe taxes and the amount that you’re taxed on your founder’s stock.

Without a Section 83(b) election, you aren’t taxed at the time stock is issued to you. However, every time your stock vests in the future, you have to pay ordinary income taxes to the extent your stock value (often referred to as “fair market value”) has increased from the date you purchased your stock. When you sell your stock, you will owe capital gains tax on the difference between the value of your stock at sale and the value you were taxed on at vesting. (Capital gains tax rates on property held for more than one year are generally lower than ordinary income tax rates. The length of time you hold your stock is called the “holding period." If you don’t make a Section 83(b) election, your holding period begins when the stock vests.)

With a Section 83(b) election, you only owe ordinary income taxes at the time of stock issuance to the extent the value of the purchased stock is greater than what you pay. If you pay fully for your stock at the time of your stock purchase, you should owe no additional income taxes. This is because our stock purchase agreement template presumes your stock value equals the issuance price (also called par value), reflecting that your company doesn’t have significant assets in it yet. If your company is beyond the “raw idea” stage, when the stock value might be higher than the issuance price, you should consult with your tax advisor. When you later sell your shares, you’re taxed on the capital gains, which is the difference between the stock’s value per share when you sell it and the value when the stock was issued to you. Another advantage of making a Section 83(b) election is that your holding period begins earlier (when you’re issued the stock), which is typically a year earlier than when you vest the first round of the initial grant.

For example, your company issues you 200,000 shares valued at 0.0001 USD per share and you pay 0.0001 USD per share using cash. With an 83(b), you don’t have an income inclusion in the year the stock is issued as you paid for the value of the shares. If you don’t pay for the value of the shares using cash or other assets, a Section 83(b) election means you choose to include as ordinary income in the year the shares are issued the full value of the stock (20 USD). If half of your stock vests one year later and the other half vests two years later, you have no tax consequences because you made a Section 83(b) election. If 3 years from now you sell your stock for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 399,980 USD (400,000 USD minus 20 USD).

If you don’t make a Section 83(b) election, you don’t have tax consequences on issuance of stock subject to vesting. However, if the value of your shares is 0.50 USD per share when half vest in one year then you would pay ordinary income taxes on 49,990 USD (0.50 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If the value of your shares is 1.00 USD per share when the second half vest in two years from issuance then you would pay ordinary income taxes on 99,990 USD (1.00 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If you sell your stock in 3 years for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 250,000 USD (400,000 USD minus 20.00 USD paid for the shares, minus 149,980 USD).

Non-founder employees receiving stock subject to vesting are also eligible for a Section 83(b) election, but mIight have additional tax considerations at the time of stock issuance. We suggest they consult with their tax advisors before making the election.

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Reporting by Luc Cohen in New York Editing by Nick Zieminski, Noeleen Walder and Howard Goller

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Reports on the New York federal courts. Previously worked as a correspondent in Venezuela and Argentina.

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