Why the 83(b) Election is a Game-Changer for Startups

Startup equity comes with a ticking clock. If you’ve received restricted stock or early-exercised stock options, one of the most important decisions you’ll make — and one that’s easy to miss — is whether to file an 83(b) election within 30 days of your grant. Here’s what the election does, why it matters, and how the filing process works today.

What is the 83(b) Election?

The 83(b) election is a provision under Section 83(b) of the Internal Revenue Code. It lets someone who receives restricted stock or other property subject to vesting choose to include the fair market value of that property in their taxable income upfront, at the time of grant, rather than waiting until it vests. That might sound backwards — why pay tax sooner than you have to? The answer comes down to how much that tax bill could grow if you wait.

A quick note on terminology: the 83(b) election applies to restricted stock awards (RSAs) and shares acquired through early-exercised stock options — property you actually own but that’s still subject to vesting. It doesn’t apply to RSUs, which aren’t taxed until they vest and settle, regardless of any election.

The Default Tax Scenario

Without an election, restricted stock or property becomes taxable as ordinary income as it vests, based on its value at each vesting date. If the stock has gained value since grant, which is ideal,  your tax bill grows right along with it.

The 83(b) Election Scenario

By filing an 83(b) election, you choose to recognize the fair market value of the property as income at the time of grant instead. You don’t need to be fully vested to make the election. In effect, you’re paying tax on today’s value, which is often low for an early-stage company. If the company grows and the stock’s value climbs, that future appreciation is typically taxed at capital gains rates when you eventually sell, rather than as ordinary income.

Why is the 83(b) Election Significant?

Tax Savings Potential

The main advantage is the potential for meaningful tax savings. Say you receive stock worth $1,000 today that’s worth $100,000 in five years. Without the election, you’d owe ordinary income tax on the full $100,000 as it vests. With the election, you’d only owe ordinary income tax on the $1,000 grant-date value — the remaining appreciation would be taxed at the lower long-term capital gains rate when you sell.

Ideal for Early-Stage Startups

The election tends to work best for founders and early employees, since the stock’s value is often quite low at the time of grant. Electing to be taxed on that low value upfront can mean substantial savings later if the company succeeds and the stock appreciates.

The Risks Involved

While the 83(b) election offers enticing benefits, nothing is without its risks. If the property becomes worthless or the restrictions never lapse, you’ve paid taxes on value you never actually receive. Additionally, once you make the election, it’s irrevocable – you can’t change your mind later.

Making the 83(b) Election

The filing deadline is strict: you must file within 30 days of receiving the property, with no extensions. Miss it, and the election isn’t available.

Since late 2024, the IRS has offered a standardized form for this, Form 15620, and as of July 2025 you can file it electronically through the IRS website for instant confirmation. Paper filing by mail is still an option if you prefer it; just use one method, not both.

Whichever way you file, the election should include:

• Your name, address, and Social Security number
• A description of the property
• The property’s fair market value at the time of grant
• A statement that you’re electing under Section 83(b)

You’ll still need to send a copy to your employer and keep one for your own records.

Conclusion

The 83(b) election is one of the most useful (and most time-sensitive) tools available to founders and early employees who receive restricted stock or early-exercised options. Choosing to recognize the property’s value upfront can mean significant tax savings if your company grows, but it comes with real risk if it doesn’t. Weigh the trade-offs carefully, and loop in a tax professional to make sure it fits your specific grant and situation.

Please reach out to our team with any questions, we are here to help you!

Related Planning

Thinking through equity decisions at a startup? These resources can help:

• Going Public? 5 IPO Planning Tips for Employees with Stock Comp — what to know once your company starts heading toward an IPO
• Stock Compensation Tax Form Checklist — the tax forms to expect once your equity starts vesting
• Launching a MedTech Company? Funding, Regulation & Success Strategies — for founders building an early-stage company
• ESPP: A Comprehensive Guide — for employees weighing other forms of equity compensation