83(b) Election
Definition
A tax election filed with the IRS within 30 days of receiving restricted stock (not RSUs, not options) that lets you pay taxes on the current value instead of the future vested value. By paying a small tax now on low-value shares, all future appreciation is taxed at long-term capital gains rates when you eventually sell.
Real-World Example
A co-founder receives 1,000,000 shares of restricted stock at $0.001/share. They file an 83(b) election and pay ~$100 in taxes (income tax on $1,000). Four years later, the shares are worth $10 each. When they sell, the entire $9,999,000 gain is taxed at long-term capital gains rates (~15-20%) instead of ordinary income (~37%).
Common Mistake
Missing the 30-day deadline. There is no extension, no exception, no appeal. If you receive restricted stock on March 1 and forget to file by March 31, you will owe ordinary income tax on each vesting date based on the then-current value, which could be millions of dollars. Also: you cannot file 83(b) for RSUs or stock options — only for restricted stock or early-exercised options.
Why It Matters
The 83(b) election is the most powerful tax tool for startup founders and very early employees. Filing a $100 form within 30 days can save you millions in taxes. Not filing it is one of the costliest mistakes in startup compensation.
Related Terms
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