The 83(b) Election: the Most Important Filing Never Made

Founders who receive restricted stock have 30 days to file an 83(b) election with the IRS. Miss the window and you owe income tax on the rising value of your shares every time a tranche vests, even if you have not seen a dollar of cash. Make the election and you lock in your tax exposure at the moment you received the stock, when its value is typically near zero. It is a one-page filing that costs nothing to submit. Missing it is one of the most expensive mistakes in startup law.

The Problem With Vesting and Taxes

When you receive restricted stock in a startup, the IRS does not tax you at the moment you get it. It waits. Under the default tax rules, you owe income tax each time shares vest, and the tax is calculated based on what those shares are worth on the vesting date, not what they were worth when you first received them.

That sounds reasonable until you model it against a real startup trajectory. Say you receive 1,000,000 shares worth a fraction of a cent each when your company is brand new, subject to a four-year vesting schedule with a one-year cliff. A year later, you have closed a seed round at a valuation that puts each share at $0.50. On your cliff date, 250,000 shares vest. The IRS sees $125,000 in taxable income, all of it ordinary income taxed at the highest rates, in a year when the company has not paid you a distribution and you cannot sell a single share to cover the bill. Every quarterly vest after that creates the same problem, at a higher share price.

A founder who goes through a Series A and a Series B before a significant vesting event can face a genuinely catastrophic tax bill on paper gains they cannot access. The only path to covering it may be a forced sale of shares at a time and price not of their choosing.

What the 83(b) Election Does

The 83(b) election is a written notice you file with the IRS that changes when and how your stock is taxed. Instead of being taxed at each vesting event, you elect to be taxed right now, at the time of the grant, based on the current value of the shares. At the moment of incorporation, before any funding, that value is typically a rounding error. You pay tax on nothing or close to it.

From that point forward, the tax rules treat your shares differently. All future appreciation, from that day to the day you sell, is taxed as a capital gain rather than ordinary income. Hold the shares for more than a year and it becomes long-term capital gain, which carries significantly lower tax rates than ordinary income.

There is a further benefit for founders in qualifying early-stage companies. Federal tax law provides a potential exclusion of up to $10 million in gain, and in some cases more, for investors and founders who hold stock in a qualified small business for at least five years. The 83(b) election is what starts that five-year clock at the grant date. Without it, the clock may not start until shares vest, which can push the holding period requirement past your exit window or disqualify the shares from the exclusion entirely. Your tax counsel can tell you whether your company and your shares qualify. Note that recent legislation has increased the exclusion cap to $15 million for stock issued after July 4, 2025.

You Have 30 Days. The Clock Starts at Grant.

The election must be filed within 30 days of the date you received your shares. Not 30 days from when you read about it, not 30 days from your next board meeting. Thirty days from the transfer date. The IRS does not extend this deadline. There are no exceptions for founders who were busy closing a funding round or moving into their first office.

The IRS now offers Form 15620, which can be filed electronically through the IRS website or mailed to the IRS office where you file your tax return. Electronic filing is now the IRS’s preferred method and provides immediate confirmation of receipt, which is a significant improvement over the old certified-mail-and-hope approach. Either way, the 30-day deadline is unchanged. Provide a copy to your company and keep one for your own records.

One timing detail that catches founders off guard: the 30-day clock typically starts on the date the board approves the grant, which can be days or weeks before you receive your paperwork. Confirm the transfer date with your counsel immediately after receiving your equity grant, not after you have had time to review all the documents.

If you have already missed the window, there is no late filing, no appeal and no workaround. Your attorney can help you understand the exposure you are carrying and whether any structural options exist to manage it, but the election itself cannot be made after the deadline has passed.

What Happens Without It

Returning to the example above: a founder issued 1,000,000 shares at $0.001 per share, on a four-year schedule with a one-year cliff, who skips the election faces this at the cliff. 250,000 shares vest. The company has raised a seed round implying $1.00 per share. The founder has $250,000 in ordinary income with no cash to pay the tax and no liquid market for the shares. That is the mild version.

A founder who goes through a Series A and Series B before hitting a significant vest can face a genuinely catastrophic tax event. The shares are illiquid. The company is not public. The only path to covering the liability may be a forced secondary sale at a time and price not of the founder’s choosing.

RSUs Work Differently

An 83(b) election is not available for restricted stock units. RSUs are a promise to deliver shares in the future, not an actual transfer of shares today. Because you do not own the stock yet, there is nothing to elect into. You will owe income tax when the shares are delivered, based on their value at that time. Early-stage startups typically issue restricted stock rather than RSUs for this reason among others, but if you are joining a company that uses RSUs, the election is off the table.

What About LLCs?

Most startup equity content assumes a C corporation structure, and for good reason: venture-backed companies are almost always incorporated as Delaware C corporations. If your company is organized as an LLC, the analysis is different and the rules are more nuanced. Founders who receive a profits interest in an LLC, meaning an interest only in future appreciation rather than current assets, may not need an 83(b) election at all, because IRS guidance generally treats that kind of grant as a non-taxable event without one. A capital interest, which carries current liquidation value, is treated differently. If you are a founder in an LLC, do not assume the C corporation rules apply. Talk to your counsel about the structure of your grant before the 30-day window becomes relevant.

A Few Things to Do Right Now

File the election as soon as you receive your stock grant, or have your attorney do it the same day. Do not hand this off to someone who might hand it off again. If the grant requires board approval before shares are formally issued, confirm with your counsel exactly when the 30-day clock starts, because the approval date and the issuance date are sometimes different.

The federal election does not automatically cover your state taxes. Most states follow the federal treatment, but not all, and some have their own filing requirements. If you are in a state with significant income taxes, confirm with your tax counsel that the state will honor the election and whether any separate state filing is required.

File the 83(b) election within 30 days of receiving your restricted stock. It converts future appreciation from ordinary income to capital gain, starts the clock on a potentially significant tax exclusion and can save a founder millions at exit. It is a one-page filing that costs nothing to submit and cannot be filed late.

This post is for general informational purposes only and does not constitute legal or tax advice. It does not create an attorney-client relationship. Tax law is complex, fact-specific and subject to change. Founders and early employees should consult qualified legal and tax counsel before making any decisions regarding equity grants, 83(b) elections or related matters.