irs cover letter 83b

Founder Advice

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

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

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

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

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

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

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

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

What is an 83(b) election?

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

Okay, but what does that actually mean?

A Simple Example 

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

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

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

What are the 83(b) tax implications?

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

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

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

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

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

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

Filed 83(b) election

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

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

Did not file 83(b) election

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

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

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

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

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

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

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

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

Step 1: Sign the required documents

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

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

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

Step 2: Prepare a cover letter for the IRS

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

• Name and SSN of spouse (if applicable)

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

Step 3: Print the required documents

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

Step 4: Prepare the mailing

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

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

Step 5: Mail the filing

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

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

How to confirm the IRS received 83(b)?

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

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

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

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

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

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

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

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

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

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

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

Step 1: Understand the Requirements

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

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

Step 2: Obtain the Necessary Forms

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

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

Step 3: Complete the 83(b) Election Statement

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

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

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

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

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

Step 5: Provide a Copy to Your Employer

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

Step 6: Attach a Copy to Your Tax Return

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

Step 7: Retain Copies for Your Records

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

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

Key Considerations and Risks

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

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

Strategic Decision-Making

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

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

Dan Gertrudes

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

Frequently Asked Questions About 83b Elections

What is an 83(b) election.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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• 83(b) elections

What is an 83(b) election?

The benefits of filing an 83(b) election, tax implications of an 83(b) election, isos and nsos, profits interests in an llc or partnership, the 30-day 83(b) election deadline, how to file form 83(b), sign your 83(b) election form electronically, how carta helps employees auto-file 83(b) election forms for early exercise , how carta helps founders auto-generate 83(b) election forms for early exercise.

Section 83(b) of the Internal Revenue Code (IRC) enables recipients of restricted securities (including stock options) to potentially lower their tax burden by paying taxes on the total fair market value (FMV) of the award at the time of issuance ( early exercising ). Employees and founders must file an 83(b) election form with the IRS to get this favorable tax treatment. Filing an 83(b) election is a complicated, multi-step process — but we’re working to make that better.

When a company grants you an equity award, you usually can’t exercise the award until it vests. And if you have a typical four-year vesting schedule , the value of your equity may increase significantly over that time. By the time you can exercise, it could cost you a lot more if you owe higher taxes resulting from the increased value of your equity.

But some companies allow employees to exercise their equity early—before it vests and while the value is lower—allowing for potential tax savings in the future. Here’s the catch: If your company offers early exercising and you purchase your equity before it vests, you must inform the IRS by filing an 83(b) election. Otherwise, it’s as if the early exercise never happened (from a tax perspective).

Note: This information is a general overview of how the 83(b) election works. Exercising stock options carries the risk that the shares will not increase in value and may not be worth anything. Talk to a tax advisor before making decisions about whether to file.

The tax impact of exercising stock options can keep startup employees from unlocking the power of their equity. Not everyone has cash available to pay a hefty tax bill—and if you work for a private company, you may not be able to sell your shares for quite a while. A lower tax bill could make ownership possible for more employees. 

Meanwhile, starting a company or joining at the very early stages involves taking a substantial risk. The possibility of a tax break can help motivate people to take that risk and build something new.

The tax implications of an 83(b) election vary by the type of equity you hold.

With these two types of stock options , you’ll file an 83(b) election if you decide to exercise your options early, before they’re fully vested. When you do, you’re basically accelerating the spread between the strike price of your options and their FMV. That means you’re not paying taxes on any potential rise in that spread as your shares continue to vest over time. If you don’t file the election, though, it’s as if your early exercise never happened.

If you have incentive stock options (ISO) when you file an 83(b) election, the spread between the FMV and your exercise price is included as income for the alternative minimum tax (AMT) . Without an 83(b), you may have to pay AMT on the spread between the strike price and the FMV as you continue to vest — instead of the spread at early exercise. This could potentially trigger the AMT or lead to a higher AMT.

If you have non-qualified stock options (NSO) , that same spread is income for ordinary income tax purposes. Failing to file 83(b) election will mean that you’ll be subject to a higher income tax rate if the FMV increases as your options vest.

With both types of stock options, if you hold your shares for a period of time before selling, you may be subject to lower tax rates when you sell. The earlier you exercise and hold your shares, the earlier those holding requirements kick in.

→ Learn more about stock option taxes.

Founders and very early-stage employees often receive restricted stock awards (RSA) . The value of these can vary based on the company’s FMV, but they’re typically issued at a nominal value (like $0.001 or $0.0001 per share). This means that if you file an 83(b) election when you receive your RSAs, you’re likely to have very limited tax liability because you’re recognizing that spread (which is zero or very, very small) as ordinary income tax up front. When you eventually sell these shares, you’ll be subject to capital gains tax on the difference in FMV at the time of sale. 

Without an 83(b) election, the spread between the FMV at vest less your purchase price would be subject to ordinary income tax.

Profits interest units (PIU) are a type of equity typically issued to employees in a limited liability company (LLC) . They are a restricted share that gives the holder a right to a portion of the future value—typically of future profits or a sale—of the company under certain restrictions. When an 83(b) election is made, the tax advantage of PIUs is similar to that of ISOs issued from a C-corp . 

Most LLCs require 83(b) elections to preserve the favorable tax status of profits interests. If PIUs are issued with an FMV of $0 (as they generally are), the recipient won’t pay taxes at the time this election is made. If an 83(b) election isn’t made within 30 days, the award could be taxed upon vesting—before the holder begins to realize any of the value of profits interest.

If you exercise early and don’t make an 83(b) election within 30 days, you won’t get the tax benefit. So if the company’s valuation has increased and you haven’t filed an 83(b), you’ll pay more in taxes when your shares vest or you sell them in the future (depending on your grant type). 

Beyond the liability for the employee or founder, this can also create tax issues for the issuing company. 

To qualify for preferential tax treatment, your 83(b) election form must be postmarked and mailed to the appropriate IRS office within 30 days of purchasing your stock grant or the date of your early exercise. 

The process for submitting this form has several steps, and can be burdensome. Here’s what the IRS requires: 

A signed, completed 83(b) election form

A copy for the issuing company

It’s also common to include a cover letter for the IRS and two copies of the form with a stamped, self-addressed envelope, though it’s not required.

When you fill out the form, you’ll need to provide the following information:

Social security number (SSN)

Number of shares

Type of shares

Issuing company name

Date granted or purchased

FMV on the above date

Amount paid for shares

Your gross income

Until recently, you had to fill out the entire form and cover letter by hand, make the copies yourself, and mail them to the IRS and your company, keeping a copy for yourself. We noticed that the 83(b) election process was difficult for employees to manage, with many people unknowingly missing the deadline. So we set out to make it easier.

The Carta policy team worked with a broad coalition of accelerators , law firms , and investors to get the IRS to temporarily allow an electronic signature for 83(b) filings during the COVID-19 pandemic. Currently, once the form is signed electronically, you still need to physically mail it to the IRS. We’re working with our coalition partners to expand this to full electronic filing of 83(b) elections , and to make the modernized process permanent when the limited relief ends on October 31, 2023. 

If you’re an eligible employee and your company manages its equity through Carta, you can now auto-file an 83(b) with Carta . We’ll send the IRS copies along with the cover letter so you don’t have to. The copy for the issuing company and for your records are automatically on Carta.

Choose shares that are eligible for early exercise in Carta. If your company allows early exercise, you’ll be able to choose those shares within your Carta account. 

Access the digital 83(b) election form. Once you have early-exercised an option grant, find the 83(b) tax form in the 83(b) elections tab of each exercised grant. At this point, you can choose to print out a form, fill it out and sign it, and send it yourself. Or you can have Carta help you. If so, you’ll keep going:

Fill out the form and provide a digital signature. If you want Carta to submit your form, you’ll need to make that selection no more than 25 days after you early-exercise your options to allow enough time for the IRS to receive the documents through the mail in the required timeframe. The electronic form saves you several steps. We pre-populate most of the information, so you can verify that it’s correct and provide your digital signature. We’ll also auto-generate a cover letter based on the information you’ve confirmed. 

Submit your form for Carta to mail on your behalf. Once you’ve confirmed, complete the 83(b) workflow by clicking the “Save this 83(b) election” button at the bottom of the screen to provide a copy of the tax form to your company and let Carta know you’re ready for us to mail it to the IRS. 

Track the form. From the 83(b) elections tab on the option grant modal, you can view the USPS tracking number and the submitted 83(b) form. We recommend entering the USPS tracking number on the USPS to access the mailing confirmation, and keeping the USPS mailing confirmation for your records. 

Founders can also take advantage of auto-generated forms on the Carta platform, making it easier than ever to file an 83(b) election . This new feature is automatically available for all founders on Carta who have been issued founder stock within the last 30 days when eligibility to file an 83(b) election is detected by Carta. We developed this tool to help founders potentially reduce their tax obligations by timely filing an 83(b) election. Carta automatically generates the 83(b) form, provides instructions on how to file, and sends an email notification that includes your issuance date and days left to file. 

After accepting a stock certificate in Carta, you’ll automatically receive an email notification and Carta will generate the 83(b) form.

Log-in to your Carta account, open the applicable certificate, and click the 83(b) elections tab to view the 83(b) election form.

Provide additional information, including your social security number and address within the Carta app. You can also choose to manually enter a different fair market value (FMV). 

When your form is completed, you can download, print, and make additional edits.

Sign and date the completed form before mailing to the IRS. 

Upload a signed copy of the form to Carta and add the date mailed. 

Access a record of the filing anytime—conveniently saved in your Carta account.

Related Content

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

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

What is an 83(b) election?

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

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

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

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

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

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

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

File within 30 days of receiving restricted shares. .

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

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

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

Check your local tax laws.

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

Should I make an 83(b) election?

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

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

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

What is an 83(b) Election?

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

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

When do you use an 83(b) election?

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

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

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

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

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

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

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

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

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

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

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

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

How is a section 83(b) election made?

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

Who Uses an 83(b) Election?

Who files an 83(b) election.

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

Should founders file an 83(b) election?

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

Can a partnership make an 83(b) election?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to report income from an 83(b) election

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

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

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

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

Where do you send an 83(b) election?

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

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

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

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

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

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

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

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

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

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

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

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

• Last Modified
• April 26, 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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