What is an 83(b) Election?

An 83(b) election is a written statement filed with the IRS that allows you to pay taxes on the total fair market value of restricted stock at the time of grant rather than as it vests. Named after Section 83(b) of the Internal Revenue Code, this election can significantly impact your tax liability when receiving equity that vests over time.

When to Use an 83(b) Election

The 83(b) election is typically beneficial in these scenarios:

  1. Founders receiving stock subject to vesting: When you purchase founder shares at a nominal value that are subject to vesting or other restrictions.

  2. Early employees receiving restricted stock: When you receive actual shares (not options) at a low valuation that will vest over time.

  3. Early exercise of stock options: When your company allows you to exercise unvested stock options early.

How an 83(b) Election Works: An Example

Let's consider a practical example:

Scenario: You're a founder who receives 1,000,000 shares of restricted stock at $0.001 per share ($1,000 total), which vest over four years.

Without 83(b) Election:

  • As each portion of your shares vests, you pay ordinary income tax on the difference between the fair market value at vesting and what you paid.

  • If your company grows significantly, this could mean substantial tax bills each vesting period.

With 83(b) Election:

  • You pay tax upfront on the full grant based on the value at grant time: ($0.001 × 1,000,000 = $1,000)

  • Since you paid fair market value, there's no additional income to tax

  • Future appreciation is only taxed as capital gains when you eventually sell the shares

The Math: Why 83(b) Elections Matter

Let's run the numbers to illustrate the potential tax savings:

Initial Facts:

  • 1,000,000 shares acquired at $0.001 per share ($1,000 total)

  • 4-year vesting schedule (250,000 shares per year)

  • Company grows rapidly, with share value increasing each year

Share Values at Each Vesting Point:

  • Year 1: $0.10 per share

  • Year 2: $0.50 per share

  • Year 3: $2.00 per share

  • Year 4: $5.00 per share

Without 83(b) Election (assuming 37% ordinary income tax rate):

  • Year 1: Tax on ($0.10 - $0.001) × 250,000 = $24,750

  • Year 2: Tax on ($0.50 - $0.001) × 250,000 = $124,750

  • Year 3: Tax on ($2.00 - $0.001) × 250,000 = $499,750

  • Year 4: Tax on ($5.00 - $0.001) × 250,000 = $1,249,750

  • Total Tax: $1,899,000

With 83(b) Election:

  • Initial Tax: $0 (assuming you paid FMV at grant)

  • Future Tax: Only capital gains tax when you sell shares

  • Potential Savings: $1,899,000 in ordinary income taxes

How to File an 83(b) Election

To properly file an 83(b) election:

  1. Prepare the election letter: Include your name, address, SSN, description of property (shares), date of transfer, restrictions, FMV at transfer, amount paid, and tax year.

  2. File within 30 days: The election MUST be filed within 30 days of receiving the restricted stock. This deadline is strict and non-negotiable.

  3. Send to the correct IRS office: Mail the election to the IRS office where you file your tax returns. Use certified mail with return receipt requested for proof.

  4. Keep copies: Retain a copy for your records and provide one to your employer for their records.

  5. Include with tax return: Attach a copy to your tax return for the year of the property transfer.

Common 83(b) Election Mistakes to Avoid

  1. Missing the 30-day deadline: The most critical and common mistake is filing late. The 30-day window is absolute.

  2. Incorrect valuation: Ensure you're using a defensible fair market value based on recent 409A valuations or financing rounds.

  3. Filing for the wrong assets: The 83(b) election applies to restricted stock, not stock options (unless early exercised).

  4. Inadequate documentation: Failing to maintain proper records of the filing can create problems during audits or exits.

Accounting Implications of 83(b) Elections

From an accounting perspective, 83(b) elections impact:

  1. Financial statement preparation: Companies must properly record stock-based compensation

  2. Tax provision calculations: The election affects when compensation expense is recognized

  3. Corporate tax deductions: The timing of corporate tax deductions is affected by when employees recognize income

Modern accounting solutions like Timber include features to track 83(b) elections and their impact on your financial statements and tax filings.

Need help managing equity and 83(b) elections?

Timber provides specialized accounting solutions for startups that simplify equity tracking, tax planning, and financial reporting. Our platform includes features designed specifically for founders and finance teams managing complex equity structures, including 83(b) election tracking.

Contact us at support@timber.com to learn how Timber can help you navigate the complexities of equity compensation and ensure you never miss critical tax deadlines.