{"id":415922,"date":"2025-02-17T14:45:04","date_gmt":"2025-02-17T14:45:04","guid":{"rendered":"https:\/\/seedlegals.com\/?p=415922"},"modified":"2025-02-17T14:45:04","modified_gmt":"2025-02-17T15:45:04","slug":"what-is-an-83b-election-and-when-do-i-need-one","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/us\/resources\/what-is-an-83b-election-and-when-do-i-need-one\/","title":{"rendered":"What is an 83(b) election and when do I need one?"},"content":{"rendered":"","protected":false},"excerpt":{"rendered":"

If you’re a founder or employee receiving stock that vests over time, you need to know about the 83(b) election.
\nWhy? Well, it can have a huge impact on your future tax liabilities, potentially saving you a lot of money.
\nIn this article we\u2019re breaking down what an 83(b) election is, when it <\/p>\n","protected":false},"author":169,"featured_media":415923,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[141],"tags":[],"event_tags":[],"class_list":["post-415922","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized-us"],"acf":{"blog_layout":"v2","v2":{"hero":{"image_background_color":"#E7F1FF","image_fit":"img--contain"},"adverts":[{"type":"selector","selected_advert":{"ID":412063,"post_author":"77","post_date":"2024-11-11 09:44:14","post_date_gmt":"2024-11-11 09:44:14","post_content":"","post_title":"US - Start free","post_excerpt":"","post_status":"publish","comment_status":"closed","ping_status":"closed","post_password":"","post_name":"us-start-free","to_ping":"","pinged":"","post_modified":"2024-11-13 16:18:26","post_modified_gmt":"2024-11-13 16:18:26","post_content_filtered":"","post_parent":0,"guid":"https:\/\/seedlegals.com\/?post_type=blog_advert&p=412063","menu_order":0,"post_type":"blog_advert","post_mime_type":"","comment_count":"0","filter":"raw"},"custom_advert":{"advert_tracking_id":"","layout":"default","image":{"image":false,"link":""},"text":{"heading":"","content":"","button":null,"background_color":"#EEF4FF","text_color":"#000646"},"form":{"form":{"type":"none","hubspot_form":{"layout":"newsletter","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":false,"gtm_form_location":false}},"cta_and_testimonials":{"heading":"","button":null,"bullet_points":false,"testimonials":false}}}],"related_sidebar_posts":false},"show_author_card":false,"revision_date":"","hero_image":415923,"has_custom_post_authors":true,"custom_post_authors":{"authors":[{"author":{"ID":169,"user_firstname":"Idin","user_lastname":"Sabahipour","nickname":"Idin Sabahipour","user_nicename":"idin-sabahipour","display_name":"Idin Sabahipour","user_email":"idin@seedlegals.com","user_url":"","user_registered":"2024-08-29 09:55:07","user_description":"","user_avatar":""},"role":"Writer"},{"author":{"ID":172,"user_firstname":"Drew","user_lastname":"Macklin","nickname":"drewmacklin","user_nicename":"drewmacklin","display_name":"Drew Macklin","user_email":"drewmacklin@seedlegals.com","user_url":"","user_registered":"2024-11-08 15:39:57","user_description":"","user_avatar":""},"role":"Legal review"}]},"is_expert_reviewed":true,"post_content_width":"default","post_content":[{"acf_fc_layout":"text","text":"

If you’re a founder or employee receiving stock that vests over time, you need to know about the 83(b) election.<\/p>\n

Why? Well, it can have a huge impact on your future tax liabilities, potentially saving you a lot of money.<\/p>\n

In this article we\u2019re breaking down what an 83(b) election is, when it makes sense to file one, and how to do it correctly.<\/p>\n"},{"acf_fc_layout":"text","text":"

What is an 83(b) election?<\/strong><\/h2>\n

An 83(b) election is named after Section 83 of the Internal Revenue Code<\/a>. It\u2019s an election that lets you pay taxes on the fair market value (FMV) of your stock when it\u2019s granted, instead of when it vests. This could make a huge difference if your stock vests over time (which is common for startup founders and employees).<\/p>\n

Without an 83(b) election, each time a bit more of your stock vests, it\u2019s considered taxable income \u2013 and that could mean you pay more tax on the vesting stock as its value grows over time.<\/p>\n"},{"acf_fc_layout":"text","text":"

What impact could filing an 83(b) election have?<\/strong><\/h2>\n

Imagine an early-stage founder is granted 40,000 shares<\/strong> at a purchase price of $0.02 per share<\/strong>, \u2018vesting over four years<\/strong> with a one-year cliff\u2019. This means 25%<\/strong> of their shares<\/strong> (10,000 shares<\/strong>) vest after one year, with the rest vesting monthly over the next three years<\/strong>.<\/p>\n

At grant, the shares\u2019 fair market value is low \u2013 also just $0.02 per share<\/strong>, or $800 total<\/strong>. But they expect the stock\u2019s value to rise significantly, reaching $5 per share<\/strong> by the end of the four-year<\/strong> period.<\/p>\n

Here\u2019s what the tax situation would look like with and without filing the 83(b) election (we\u2019ll ignore any employment or state tax impacts).<\/p>\n

Option 1: The founder does<\/span> file an 83(b) election<\/strong><\/h3>\n

If the founder files an 83(b) election, they\u2019ll pay tax on the stock\u2019s fair market value (FMV) at grant, before it vests. Since they are purchasing the shares at the same FMV of $0.02 per share,<\/strong> their total initial taxable income is just $800<\/strong> (40,000 shares x $0.02<\/strong>).<\/p>\n

Assuming a 37% income tax rate<\/strong> (the maximum ordinary income tax rate), this means a tax payment of $296<\/strong>.<\/p>\n

Since they\u2019ve already paid tax on the shares upfront, they won\u2019t owe any additional income tax as the stock vests \u2013 which becomes especially beneficial if the stock\u2019s value increases over time.<\/p>\n

Altogether, their total income tax liability with the 83(b) election is $296.<\/strong><\/p>\n\n\n\n\n\n\n\n\n\n
Stage<\/strong><\/td>\nWith 83(b) election<\/strong><\/td>\n<\/tr>\n
At grant<\/strong><\/td>\n$296 (40,000 shares x $0.02 x 37%)<\/td>\n<\/tr>\n
End of year 1<\/strong><\/td>\nNo additional tax owed<\/td>\n<\/tr>\n
End of year 2<\/strong><\/td>\nNo additional tax owed<\/td>\n<\/tr>\n
End of year 3<\/strong><\/td>\nNo additional tax owed<\/td>\n<\/tr>\n
End of year 4<\/strong><\/td>\nNo additional tax owed<\/td>\n<\/tr>\n
Total ordinary income tax<\/strong><\/td>\n$296 (paid at grant)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Option 2: The founder doesn\u2019t<\/span> file an 83(b) election<\/strong><\/h3>\n

If the founder doesn\u2019t file an 83(b) election, they\u2019ll pay income tax each time stock vests, based on the fair market value at the time of vesting.<\/p>\n

This means after the first year<\/strong>, 25% of the stock<\/strong> (10,000 shares<\/strong>) vests. If the FMV has increased to $0.50 per share<\/strong>, this creates $5,000 of taxable income<\/strong> (10,000 shares x $0.50<\/strong>). At a 37% tax rate<\/strong>, this results in a tax bill of $1,850<\/strong>.<\/p>\n

In the second year<\/strong>, as shares continue to vest monthly, let\u2019s say the FMV reaches $1 per share<\/strong>. They now owe tax on an additional $10,000<\/strong> (10,000 shares x $1<\/strong>), bringing the tax bill to $3,700 that year<\/strong>.<\/p>\n

By the third year<\/strong>, the FMV could have risen to $3 per share<\/strong>, and this year\u2019s 10,000 vested shares<\/strong> lead to $30,000 of taxable income<\/strong> \u2013 this creates a tax liability of $11,100 for year three<\/strong>.<\/p>\n

By year four<\/strong>, the stock\u2019s value has grown to $5 per share<\/strong>. This results in $50,000 of taxable income<\/strong> (10,000 shares x $5<\/strong>), with a tax bill of $18,500 that year<\/strong>.<\/p>\n

Over these four years, the total ordinary income tax paid on vested shares reaches $35,150<\/strong>.<\/p>\n\n\n\n\n\n\n\n\n\n
Stage<\/strong><\/td>\nWith 83(b) election<\/strong><\/td>\nWithout 83(b) election<\/strong><\/td>\n<\/tr>\n
At grant<\/strong><\/td>\n$296 (40,000 shares x $0.02 x 37%)<\/td>\nNo tax payment<\/td>\n<\/tr>\n
End of year 1<\/strong><\/td>\nNo additional tax owed<\/td>\n$1,850 (10,000 shares at $0.50 x 37%)<\/td>\n<\/tr>\n
End of year 2<\/strong><\/td>\nNo additional tax owed<\/td>\n$3,700 (10,000 shares at $1 x 37%)<\/td>\n<\/tr>\n
End of year 3<\/strong><\/td>\nNo additional tax owed<\/td>\n$11,100 (10,000 shares at $3 x 37%)<\/td>\n<\/tr>\n
End of year 4<\/strong><\/td>\nNo additional tax owed<\/td>\n$18,500 (10,000 shares at $5 x 37%)<\/td>\n<\/tr>\n
Total ordinary income tax<\/strong><\/td>\n$296 (paid at grant)<\/td>\n$35,150 (taxed over four years)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

In total, without the 83(b) election, the founder\u2019s tax liability is $35,150<\/strong> compared to $296<\/strong> if they had filed an election. The election meant their tax bill was based on the fair market value of their stock at grant \u2013 regardless of any future appreciation in its value.<\/p>\n

So, even if the share value rose to $100<\/strong> after the four years, as long as they\u2019d correctly filed an 83(b) election, they still wouldn\u2019t pay income tax when the stock vests.<\/p>\n"},{"acf_fc_layout":"text","text":"

83(b) elections can simplify your tax reporting<\/h2>\n

Filing an 83(b) election isn\u2019t just about tax savings \u2013 it also reduces administrative burdens for both founders and companies.<\/p>\n

Without it, each vesting event triggers a new taxable event for the founder, meaning the company must determine the FMV at each vesting date, handle tax withholding, and cover its share of employment taxes.<\/p>\n

Filing an 83(b) election simplifies reporting and eases the administrative load for everyone involved.<\/p>\n"},{"acf_fc_layout":"text","text":"

When should I file an 83(b) election?<\/strong><\/h2>\n

You need to file your 83(b) election within 30 days of receiving the shares.<\/p>\n

This is a strict deadline, so if you miss it, your shares will be taxed as ordinary income when they vest.<\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"Even if you receive stock subject to vesting at the time of the company\u2019s incorporation, you should still file an 83(b) election if you want to benefit from the favorable tax treatment<\/b>.","link":null},{"acf_fc_layout":"text","text":"

When shouldn\u2019t I file an 83(b) election?<\/strong><\/h2>\n

Filing an 83(b) election is almost always a good idea when you have shares that are subject to vesting.<\/p>\n

But there are some situations where it may not make sense.<\/p>\n

 <\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"Filing an 83(b) election is not reversible<\/b>, so think carefully before you make the submission.","link":null},{"acf_fc_layout":"text","text":"

High upfront tax cost<\/strong><\/h3>\n

If your stock\u2019s granted at a high fair market value, choosing an 83(b) election means you\u2019ll have to pay a large tax amount on the total value upfront. For instance, if you\u2019re granted 100,000 shares<\/strong> valued at $5 per share<\/strong>, this results in $500,000<\/strong> of taxable income, which could lead to a federal tax bill of $185,000<\/strong> (assuming the maximum ordinary income tax rate of 37%<\/strong>). Paying taxes on that amount could be tough if you don\u2019t have the cash on hand, so it might be better to spread tax payments over time as and when the shares vest.<\/p>\n

Concern about the stock\u2019s future value<\/strong><\/h3>\n

If you\u2019re uncertain about the company\u2019s growth prospects, it may be wise to hold off on an 83(b) election. Filing an election to pay tax upfront could mean you end up taxed on a value that never materializes. Without an 83(b) election, you\u2019d only pay tax on the actual (possibly lower) value of the stock as it vests \u2013 which could reduce your tax bill. Although, by doing this, you\u2019d be betting that the company would actually fall in value while you hold stock!<\/p>\n

Uncertainty about staying through the vesting period<\/strong><\/h3>\n

If you leave the company before your stock vests (or fail to meet other vesting requirements), you\u2019ll probably forfeit any unvested stock.<\/p>\n

If that happened, you would still be out-of-pocket for the tax you paid upfront. Since 83(b) taxes are non-refundable, this can mean you\u2019ve paid tax for shares you never received.<\/p>\n

 <\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"An 83(b) election is only necessary if your stock vests over time<\/b>. If your shares are fully vested when granted, you don\u2019t need to file the election because the tax is already determined at grant. You\u2019ll owe tax on the difference between the fair market value at that time and the amount you paid per share.","link":null},{"acf_fc_layout":"text","text":"

Who is responsible for filing an 83(b) election?<\/strong><\/h2>\n

Whether you\u2019re an employee, founder or consultant, if you\u2019re receiving the stock, then it\u2019s your job to make the 83(b) filing with the Internal Revenue Service (IRS).<\/p>\n

The company might give you some guidance on the process, but the responsibility to complete the paperwork rests with you.<\/p>\n

We\u2019ll go over how you file your 83(b) election below.<\/p>\n"},{"acf_fc_layout":"text","text":"

How do I file an 83(b) election?<\/strong><\/h2>\n

1. Prepare the election document<\/strong><\/h3>\n

If you create a Founder Agreement with SeedLegals, we\u2019ll do this for you. <\/em><\/p>\n

Otherwise, you can access the 83(b) election form on the IRS website here<\/a>.<\/p>\n

2. Sign and send the document<\/strong><\/h3>\n

Once you\u2019ve filled in the form (or we\u2019ve sent it to you), here\u2019s what you need to do:<\/p>\n