- Filing an 83(b) election: What every founder needs to know
- What is an 83(b) election?
- Why file an 83(b) election?
- How an 83(b) election is taxed
- With an 83(b) election
- Without an 83(b) election
- What are the risks of filing?
- What types of equity are eligible for an 83(b) election?
- Restricted stock awards (RSA)
- ISOs and NSOs: Early-exercised stock options
- Profits interests in an LLC
- How to file an 83(b) election
- Step 1: Get your grant details
- Step 2: Complete and sign the form
- Step 3: Mail the form to the IRS
- Step 4: Distribute and store your copies
- The 30-day 83(b) election deadline you can't miss
- Get expert help when you need it
- Frequently asked questions about the 83(b) election
Making the right decisions about equity can help founders and early employees save a significant amount on taxes, but it's a complex process that many are unprepared for. According to a 2022 survey, 63% of employees don’t know how to reduce the tax liability related to their equity. For some, this knowledge gap can be costly: Proper tax planning could mean the difference of tens to even hundreds of thousands of dollars. For instance, understanding steps like filing an 83(b) election within 30 days of an early exercise or the purchase of restricted stock can lead to large tax savings that might otherwise be missed.
This article explains the Section 83(b) election, a time-sensitive tax filing that can help founders and early employees save a significant amount on taxes. We cover what it is, the potential benefits and risks, and the step-by-step process for filing correctly.
What is an 83(b) election?
An 83(b) election is a provision under Section 83(b) of the Internal Revenue Code (IRC) that gives the recipients of restricted stock the opportunity to pay taxes based on its fair market value (FMV) on the date it was received, rather than the date it vests. The 83(b) election provides potential tax advantages for founders, employees, advisors, service providers, and other recipients of equity—especially at high-growth startups where the value of the shares is expected to appreciate. This provision only applies to equity that is subject to a substantial risk of forfeiture (vesting).
The Internal Revenue Service (IRS) typically taxes founder shares and restricted stock upon vesting, but filing an 83(b) election allows equity holders to lock in their tax obligations on the grant date. To receive favorable tax treatment, equity holders must file an 83(b) election form with the IRS within 30 days of the issuance date. Missing the 30-day window can result in a higher tax burden and limited long-term gains.
Think of it as choosing to pay a small tax bill now to potentially avoid a much larger one later. Without this election, you would be subject to the default rules for how stock options are taxed as your stock vests over time.
Note: This information is a general overview of how the 83(b) election works. Talk to a tax advisor before making decisions about whether to file.
Why file an 83(b) election?
The main reason to file an 83(b) election is the potential for significant tax savings down the road. For some employees, knowing how to reduce their tax liability could mean the difference between tens to even hundreds of thousands of dollars.
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, you will be taxed as your options vest, when the value could be higher, rather than all at once at grant. The 83(b) election lets you choose when to pay that income tax.
There are two main types of tax to understand.
Ordinary income tax is the tax you pay on your salary and is typically at a higher rate
Capital gains tax is the tax you pay on profits from investments, and its long-term rate is usually lower
Filing an 83(b) election allows you to pay ordinary income taxes on the value of the stock when you acquire it. Any increase in value after that point is treated as a capital gain.
Acquiring the shares also starts the clock on your holding period. This is important for two reasons. First, you need to hold the stock for more than a year after exercising to qualify for the lower long-term capital gains rates. Second, it starts the clock for qualified small business stock (QSBS), a powerful tax incentive that allows eligible taxpayers to exclude up to $15 million or 10x basis (whichever is greater) in gains from federal tax if they meet the requirements.
How an 83(b) election is taxed
To see the financial impact of this decision, let's look at two different paths. Imagine you've just founded your company and are granted your founder shares. Here are the two ways your tax journey could unfold.
With an 83(b) election | Without an 83(b) election |
You pay tax based on the stock's value at the grant date | You pay no tax at the grant date |
You pay no additional tax as your shares vest | You pay ordinary income tax based on the value of your shares each time a portion vests |
When you sell your shares, your profit is treated as a capital gain | When you sell your shares, your profit is treated as a capital gain, but your cost basis is higher |
With an 83(b) election
When you file an 83(b) election, you recognize the value of all your unvested shares as taxable income in the calendar year they are granted. The amount paid for shares of restricted stock will typically equal the fair market value of the shares when you acquired them, so the upfront tax is minimal or zero.
As your company grows and your stock becomes more valuable, you do not have any tax events at the time of vesting. This helps you avoid future tax bills at times when you may not have the cash to pay them.
Without an 83(b) election
If you don't file an 83(b) election, you pay tax with each vesting milestone. As a portion of your shares vests, the difference between the amount you paid to acquire the shares and the FMV of those shares at the time of vesting is counted as ordinary income for that year.
This creates a phantom income problem: you owe real taxes on income that is still locked up in private company stock, which you likely cannot sell to cover the tax bill. This financial risk is significant, as a Carta survey found that for 23% of employees, the inability to afford the associated taxes was a key reason they didn't exercise their options.
As Shelby Skoczylas, a manager on the equity advisory team at Carta, explains during the Equity Compensation: Three Essentials You're Not Thinking About webinar, this taxable event happens at every single vesting date, creating an ongoing tax liability as the company's value increases.
What are the risks of filing?
Filing an 83(b) election is a bet on your company's future success, and it's not without risk. While it's often a smart move for founders, you should understand the potential tax consequences and downsides before you file.
Here are the primary risks:
You may pay tax on stock you might forfeit in certain cases: If you leave your company before your shares are fully vested, you lose the unvested shares. While you will often not owe tax on the filing of an 83(b) election if you acquired the shares for the same price as their current FMV, if you have paid taxes, this risk could be significant, as the median job tenure for a startup employee is just two years (half the length of a typical four-year vesting schedule). Recent data on startup employee turnover further highlights this risk, showing that 43.4% of employees hired in 2021 had already left their jobs within two years, forfeiting at least half of their initial equity grant.
You pay tax on stock that might lose value: If the company's value goes down or it fails, you will have potentially paid tax on stock that is now worthless, a real risk given that people often overestimate the value of their equity. The IRS does not provide a refund in this situation.
Because of these risks, it's always a good idea to consult a personal tax advisor. They can help you understand how this decision fits into your specific financial situation.
What types of equity are eligible for an 83(b) election?
The tax implications of an 83(b) election vary by the type of equity you hold. The 83(b) election applies to restricted property, like stock, that is transferred in connection with the performance of services and is subject to vesting. Here are the most common types of equity that are eligible.
Restricted stock awards (RSA)
Founders and very early-stage employees may receive restricted stock awards (RSAs), which are considered restricted because the shares cannot be freely transferred or traded. These restrictions allow the company to stay in compliance with securities laws. This makes RSAs the most common type of equity for which founders file an 83(b) election.
The value of RSAs 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 limited tax liability because you’re recognizing that spread (which is zero or 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 of the shares at each point of vesting and your purchase price would be subject to ordinary income tax rates (higher than capital gains).
Because these shares are often granted when the company has a very low valuation, the upfront tax from an 83(b) filing is often zero or very small. This makes it a straightforward decision for many founders.
ISOs and NSOs: Early-exercised stock options
Some companies offer a feature called early exercise. 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. The 83(b) election is filed for the shares you purchase through early exercise, not for the stock options themselves.
When you do, you’re basically accelerating the spread between the strike price of your options and their FMV. This means you won’t pay taxes on any potential rise in that spread as your shares continue to vest over time. If you don't file the election, you have the potential for a large tax bill in the future.
If you have early exercised 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) election, you may have to pay AMT on the spread between the strike price and the FMV on vesting tranches as you continue to vest—instead of the spread at the time of early exercise. This could potentially trigger the AMT in the future or lead to a higher AMT.
If you have non-qualified stock options (NSO), that same spread is considered income for ordinary income tax purposes. Failing to file an 83(b) election means you could be subject to a higher income tax rate if the FMV increases as your early exercised options vest.
With both these types of stock options, if you hold your shares for a period of time before selling, you may be subject to lower capital gains tax rates when you sell. The earlier you exercise and hold your shares, the earlier those holding period requirements kick in.
If you don't early exercise, an 83(b) election is not applicable to your options. For companies that do offer it, it can be a powerful benefit. As Carl Olson, senior director of finance and administration at Luminary Cloud, notes, "Most people have never heard of QSBS or early exercise, so we wanted an easier way to educate our employees on how they worked and to help them understand that these benefits could have a significant impact on the value they got from their equity."
→ Learn more about stock option taxes.
Profits interests in an LLC
Profits interest units (PIU) are a form of equity common in a limited liability company (LLC) or limited liability partnership (LLP). PIUs are a restricted instrument 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.
Filing an 83(b) election for PIU is a standard and highly recommended practice, and most LLCs require 83(b) elections to preserve the favorable tax status of profits interests. For example, if PIUs are issued with an FMV of $0, 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.
Because LLC equity can be complex, Carta’s Equity Management for LLCs platform is built to handle the specific needs of PIU, including tracking and reporting, which simplifies life for the company's finance team.
How to file an 83(b) election
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 the date of your restricted stock grant or the date of your early exercise.
The process of filing an 83(b) election can feel a bit old-fashioned, but learning how to file Form 83(b) is a straightforward process. Following these steps carefully will help you complete your filing correctly and on time.
Step 1: Get your grant details
To complete the form, you'll need specific information about your equity grant. This includes your name, address, and taxpayer ID number, as well as the grant date, number of shares, type of shares, the stock's FMV, and the amount you paid for it.
If your company uses Carta for cap table management, your portfolio organizes all of this information for you to easily find. The company's 409A valuation determines the FMV; Carta's 409A services help thousands of companies stay compliant.
Step 2: Complete and sign the form
The IRS now provides a standardized form for this election, Form 15620, which can be filed as a written statement. However, many people still use a standard letter template provided by their law firm. While the 83(b) is an employee-side filing, companies have their own reporting obligations, such as issuing a Form 3921 to employees who exercise ISOs.
After you fill out the form with your grant details, you'll need to sign it. Make at least three copies: one to send to the IRS, one for your company's records, and one to keep for your own personal tax files.
It’s also common to include a cover letter for the IRS and a copy of the form (in addition to the original signed 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:
Name
Address
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
Step 3: Mail the form to the IRS
This is the most time-sensitive step. The form must be postmarked and timely filed with the IRS within 30 days of your grant date.
It's highly recommended to use certified mail with a return receipt requested. This receipt is your official proof that you filed on time. Keep this receipt with your copy of the election form, as it can be invaluable if the IRS ever questions your filing.
Mail the original completed and signed election form and cover letter, along with one copy of the 83(b) election form and a self-addressed stamped return envelope to the IRS Center where you would otherwise file your income tax return. Sending the election via certified mail, requesting a return receipt, with the certified mail number written on the cover letter is recommended.
Then mail one copy to your company, and also keep a copy for your permanent records.
→ Learn more about filing 83(b) elections on Carta’s Support site.
Step 4: Distribute and store your copies
After mailing the original form to the IRS, provide a copy of the signed election to your company, as this documentation is important for compliance with securities regulations like Rule 144. You should also store your personal copy and the certified mail receipt in a safe place.
The 30-day 83(b) election deadline you can't miss
The 83(b) election deadline is strict and unforgiving. 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 the date of your restricted stock grant or the date of your early exercise. If you exercise early and don’t make an 83(b) election within 30 days, you won’t get to take advantage of the tax benefit.
If you miss the deadline, there are no extensions or exceptions. You simply lose the opportunity to make the election for that grant. This means you will be taxed on the value of your shares as they vest, which could result in a much higher tax bill and potentially trigger the AMT if your company's value increases over your vesting period.
If your company’s valuation increases over time 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).
It's critical to know that the grant date is the day the board approves the grant, which can be days or even weeks before you receive the official paperwork. This creates a very short window to act. Beyond the liability for the individual employee or founder, this can also create tax withholding issues for the issuing company. An accurate, professionally managed cap table is a founder's best friend here, as it provides a single source of truth for grant dates so there's no confusion about when the 30-day clock starts.
Contact your tax professional to review your Section 83(b) election before filing with the IRS and assist you with the filing process. Non-individual purchasers (for example, corporations or trusts) should contact legal and tax professionals licensed in their jurisdiction.
Get expert help when you need it
It's completely normal to feel uncertain about tax decisions, especially when it comes to your equity. While this guide covers the basics, effective tax planning for small businesses is complex, and it's always a good idea to consult a personal tax advisor.
For companies that want to provide this support to their whole team, services like Carta's Equity Advisory can help. This service offers one-on-one sessions with tax experts, part of a broader set of equity and tax education resources that can help employees understand their equity and make informed decisions. For Eric Mogil at RADAR, providing this resource is a clear win: “For every single startup I advise, I tell them to use Carta. It’s a no-brainer.”
To see how Carta can help you and your team maximize potential tax savings like the QSBS exclusion, request a demo today.
Frequently asked questions about the 83(b) election
Do I need to file an 83(b) for fully vested stock?
No, an 83(b) election is only for property that is unvested at the time of grant. Fully vested stock is taxed as ordinary income at grant by default.
Can I cancel an 83(b) election?
No, the 83(b) election is irrevocable once it has been filed with the IRS. This is why it's a decision that requires careful thought and, ideally, advice from a tax professional.
Do I need to file an 83(b) election for my SAFE?
No, a Simple Agreement for Future Equity (SAFE) is a contract, not stock. An 83(b) election may apply later to the shares you receive from the SAFE conversion, but only if those shares are subject to a vesting schedule.
Can you file an 83(b) election for stock options?
No, you cannot file an 83(b) election for the grant of a stock option itself, whether it's an ISO or an NSO. You can only file it for the shares of stock you receive when you exercise that option and only if you exercise before the shares have vested.
Is an 83(b) election required for LLC profits interests?
While the IRS doesn't explicitly require it, filing an 83(b) election for profits interests is the universal best practice, and it simplifies tax season when the company files its Form 1065. Tax professionals strongly recommend it to protect the favorable tax treatment of your equity and confirm your personal Schedule K-1 is accurate.
Can you file an 83(b) election late?
No, the 30-day deadline is strict and cannot be extended for any reason. If you postmark your filing after the deadline, the IRS will consider it invalid, and you will owe tax as your shares vest.
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