An 83(b) election is a provision under the US Internal Revenue Code that allows an individual to pay taxes on the total fair market value of restricted stock at the time of granting rather than the time of vesting. This provision changes the timing of tax assessment for stock ownership or equity compensation granted by an employer.

When a person receives equity in a company that is subject to a vesting period, they typically owe taxes on the shares as the shares vest. But with an 83(b) election, the individual can choose to pay taxes on the full value of the equity up front, based on the value at the time of the grant. This can benefit the individual if they expect the value of the equity to increase over time, because the taxes they pay at the grant date could be substantially lower than the taxes they would pay later, as the shares vest at potentially higher valuations.

Below, we’ll explain how to file an 83(b) tax election, as well as the tax effects and potential benefits and risks. Here’s what you should know.

What’s in this article?

• Pros and cons of an 83(b) election
  
• Tax effects of 83(b) elections
  
• What is the 30-day deadline for 83(b) elections?
  
• How to file an 83(b) election
  
• 83(b) election tax implications
  
• How Stripe Atlas can help
  
• FAQs about how to file an 83(b) tax election
  

Pros and cons of an 83(b) election

Keep these 83(b) election pros and cons in mind when choosing whether to proceed with one:

Benefits of 83(b) elections

The 83(b) election for stock or equity in a company carries several benefits. Generally, however, these benefits matter only if the company grows in value over time. If you make an 83(b) election, keep detailed records including the election letter, valuation used to determine the fair market value at the time of the election, and any correspondence with the IRS to reference for future tax filings.

• Tax rates: By choosing an 83(b) election, you pay taxes on the equity at its current market value, regardless of how much the value might increase in the future. If the equity’s value rises over time, you could save a substantial amount in taxes, because the appreciation won’t be taxed as income when the shares vest.

• Capital gains: When you make an 83(b) election, any future appreciation in the value of the stock is eligible for capital gains treatment if you hold the stock for the required period (typically, more than one year), even if it hasn’t fully vested. Capital gains rates are generally lower than ordinary income tax rates, which would apply to stock vesting without an 83(b) election. As of 2023, the tax rate on most net capital gain doesn’t exceed 15% for most individuals.

• Tax certainty: The 83(b) election offers more clarity on the tax implications of your equity compensation. You’ll know exactly how much you owe in taxes at the time of the election, which removes some of the uncertainty around what the tax burden will be in the future as the stock vests and potentially appreciates in value.

Risks associated with 83(b) elections

Deciding whether to make an 83(b) election depends on a variety of factors, including your view of the company’s future and your own financial situation and risk tolerance. Predicting the future value of equity can be challenging. While 83(b) elections can offer benefits under the right circumstances, they also carry inherent risks.

• Up-front tax payment: By choosing an 83(b) election, you commit to paying taxes up front on the fair market value of the equity, whether or not the shares have vested. This means you’re paying taxes on assets that you don’t fully own yet and might never fully receive if certain conditions aren’t met.

• No refunds: If the value of the equity decreases after the election, you don’t receive a refund on the taxes you paid based on the initial higher value. This can be an issue in volatile markets or if the company’s fortunes decline.

• Risk of forfeiture: If you leave the company before your stock vests or if you’re otherwise unable to meet the conditions for vesting, you forfeit the unvested shares without compensation. Since you’ve already paid taxes on these shares, you don’t get the taxes back.

• Liquidity risk: You must pay the tax liability incurred from an 83(b) election even if you never sell the stock. This means you need to have sufficient liquidity to cover the tax bill without relying on selling the equity, which might not yet be liquid.

• Tax implications on loss: If you make an 83(b) election and the stock becomes worthless, you might face challenges in claiming a loss on the investment. The ability to deduct losses on your tax return can be complex and might depend on different factors, including your tax status and the nature of the investment.

What happens if you choose not to file an 83(b)?

If you choose not to file an 83(b) election or you miss the deadline to file, the tax treatment of your restricted stock or equity compensation follows the IRS’s standard rules for these types of assets.

• Taxation upon vesting: Without an 83(b) election, you will be taxed on the fair market value of the stock at the time each portion vests. If the stock’s value increases between the grant date and the vesting dates, you will be taxed on this higher value. The income recognized at vesting is taxed at ordinary income tax rates.

• Covering tax liabilities: Often, employers will withhold taxes for vested shares, which can result in the employer selling a portion of the vested shares to cover the tax liabilities.

• Capital gains: Any increase in the stock’s value after vesting is considered a capital gain. The holding period for long-term capital gains (which benefit from lower tax rates) begins at vesting, not at the grant date, so you would need to hold the stock for over a year post-vesting to benefit from long-term capital gains rates.

• Forfeiture: If you leave the company before the stock vests and you haven’t made an 83(b) election, you don’t pay taxes on the unvested shares because you never received them.

What scenarios could make an 83(b) election more or less advantageous?

Whether or not an 83(b) election makes sense for you will depend on your personal circumstances and your outlook on the company's trajectory. Here are some situations where the election tends to work in your favor—and some where it may not.

Situations where an 83(b) election could be more advantageous:

High growth potential: If you're joining an early-stage startup with a low current valuation but strong growth prospects, filing an 83(b) election locks in a minimal tax bill now. If the company's value rises significantly by the time your shares vest, you'll have avoided paying ordinary income tax on that appreciation.

Low fair market value at grant: When the fair market value of your equity is very low at the time of the grant, which often happens with founders' shares or early employee grants, the upfront tax burden of an 83(b) election is minimal. This makes an 83(b) election a low-risk way to start the clock on long-term capital gains treatment.

Long vesting schedule: If your equity is subject to a multiyear vesting schedule, a growing company's stock could be worth considerably more by the time later portions vest. An 83(b) election shields all of that future appreciation from ordinary income tax rates.

Sufficient liquidity: If you have the cash on hand to comfortably cover the upfront tax liability without needing to sell shares, the financial risk of the election is reduced significantly.

Situations where an 83(b) election could be less advantageous:

Uncertain company outlook: If the company's future is unclear or the industry is particularly volatile, betting on future appreciation by paying taxes upfront can be a gamble. A decline in value after the election means you've overpaid with no recourse.

High current valuation: If the stock already carries a high fair market value at the time of your grant, the immediate tax bill from an 83(b) election could be substantial. This generally happens with later-stage companies or those that have recently completed a funding round at a high valuation.

Short expected tenure: If there's a reasonable chance you'll leave the company before your shares fully vest, an 83(b) election exposes you to paying taxes on shares you may ultimately forfeit, with no way to recover those payments.

Limited liquidity: If covering the upfront tax liability would require taking on debt or selling other assets, the financial strain may outweigh the potential long-term tax savings, particularly if the company's growth is not guaranteed.

Tax effects of 83(b) elections

The primary effect of an 83(b) election is the taxation shifts to the time of the grant. Without an 83(b) election, taxes are due as shares vest, and the income recognized is based on the fair market value of the shares at the time of vesting. An 83(b) also impacts your tax status in the following ways.

• Immediate taxable income: When you make an 83(b) election, you’re choosing to include the fair market value of the equity at the time of the grant in your taxable income immediately, rather than waiting until the shares vest. This is treated as ordinary income and is taxed at your regular income tax rate.

• Long-term capital gains: After making the 83(b) election, any increase in the value of the stock will be taxed as capital gains when you sell the shares, provided they are held for the necessary period (over a year). If the shares appreciate after the election, this could result in lower taxes compared to the ordinary income tax rates that would apply to the vested shares without the election.

• Alternative Minimum Tax (AMT) liability: The 83(b) election can also have implications for the AMT, a parallel tax system designed to ensure that taxpayers with substantial deductions or certain types of income pay at least a minimum amount of tax. Including the income from the 83(b) election could potentially trigger or increase AMT liability.

• Tax losses: If the stock value decreases after you make an 83(b) election, recognizing a tax loss can be complex. You might only be able to take a capital loss when the stock is sold or becomes completely worthless, which might not fully offset the initial tax payment made at the time of the election.

What is the 30-day deadline for 83(b) elections?

The IRS gives you 30 days to decide whether to file an 83(b) election after you receive stock that is subject to a vesting schedule. You must file the 83(b) election with the IRS within 30 days of receiving the equity, or you lose the opportunity to elect for that grant. The 30-day period includes weekends and holidays. To ensure you can prove timely filing of your 83(b) election, use a method that provides proof of submission, such as certified mail with a return receipt.

How to file an 83(b) election

When you file an 83(b) election, you inform the IRS that you want your stock to be taxed up front. Here’s how to do this:

• Complete the IRS election form: Form 15620 is the IRS’s official form for the 83(b) election. Here's what you'll need to share on the form:

• Your identity: Your name, taxpayer identification number (TIN), and address.

• Description of property: A description of the property being transferred, including the quantity. For example: “1,000 shares of Class A common stock of Corporation B.”

• Transfer date: The date the property was transferred to you.

• Tax year: The taxable year for which the election is being made—the year that includes the transfer date from Box 3.

• Restrictions: A description of the restrictions on the property, such as vesting conditions.

• Fair market value: The total fair market value of the property at the time of transfer.

• Amount paid: The total amount you paid for the property, if anything, broken out as price per item multiplied by quantity.

• Amount to include in gross income: The taxable spread—Box 6(c) minus Box 7(c). This is the amount you're electing to recognize as income now.

• Service recipient (optional): The name, TIN, and address of the company or person you're providing services to. This box is optional and not required for a valid election.

• Signature: Your signature and the date, affirming under penalty of perjury that the information is true, correct, and complete.

• Mail the form to the IRS: Submit the completed and signed Form 15620 by mail to the IRS office where you file your federal income tax return. You must do this within 30 days of the stock grant date. Use certified mail with return receipt so you have proof of the filing date.

• Provide a copy to your company: Send a copy of the completed form to the person or company for whom you're performing services. If you and the transferee of the property are different people, the transferee must also receive a copy.

• Attach a copy to your tax return: In the tax year you make the election, attach a copy of Form 15620 to your federal income tax return.

• Keep records: Hold onto your filed copy of Form 15620 and your certified mail receipt. If there's ever a dispute with the IRS, these prove you filed on time.

Once you file an 83(b) election, it is irrevocable. Consult with a tax professional or financial advisor to determine if this election aligns with your overall financial strategy.

Where to mail the 83b election​?

Mail the 83b election form to the IRS office where you file your tax returns. You must do this within 30 days of the stock grant date. In order to have proof of the filing date, use certified mail with a return receipt.

83(b) election tax implications

The 83(b) election allows you to recognize income on equity at the time of grant rather than at vesting, which can result in notable tax savings if the company's value grows over time.

ISOs

Incentive stock options (ISOs) are a type of stock option commonly granted to employees as part of their compensation packages. They can be granted only to employees, not consultants or board members, and there’s a $100,000 limit on the value of ISOs that can become exercisable (vest) in any one year.

You can file an 83(b) election if you want to exercise your ISOs before they're fully vested. Doing so allows you to avoid higher taxes on any potential rise in the fair market value as they continue to vest. ISOs already offer favorable tax treatment if you meet the qualifying disposition—holding shares for at least one year after the exercise date and two years after the grant date. In this case, gains are taxed as long-term capital gains rather than ordinary income. Note that the difference between the grant price and market price at exercise could still be subject to the AMT.

NSOs

Non-qualified stock options (NSOs) are another common type of stock option. NSOs can be granted to employees, directors, contractors, and others.

Without an 83(b) election, exercising NSOs triggers ordinary income tax on the difference between the exercise price and the market value at the time of exercise, and that amount is also subject to employment tax withholding. Filing an 83(b) election changes the tax treatment on future appreciation: rather than paying income tax on any increase in the value of the stock when you sell, you pay capital gains tax instead, which typically means a lower rate.

RSAs

Restricted stock awards (RSAs) are a form of equity compensation that employers offer employees. RSAs give employees the right to acquire or receive shares once they meet certain requirements, typically tied to employment period or performance milestones.

RSAs are taxed as ordinary income at vesting, with the taxable amount equal to the fair market value of the shares on the vesting date. Filing an 83(b) election lets you recognize the fair market value of the shares at the time of grant as ordinary income instead, locking in what is typically a lower valuation. If the company's stock value grows significantly between grant and vesting, this can result in substantial tax savings.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise, open a bank account, and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You’ll choose your company structure, instantly confirm whether your company name is available, and add up to four cofounders. You’ll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers, and then e-sign all your documents. Any cofounders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your EIN. Founders with a US Social Security number, address, and cell phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g., copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you—whether you are a US or non-US founder—with USPS Certified Mail and tracking. You’ll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world’s leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance, and operations from industry leaders like AWS, Carta, and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you’ll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

Learn more about how Atlas can help you set up your new business quickly and easily, and get started today.

FAQs about how to file an 83(b) tax election