The Section 83(b) Election: The Startup Founder’s Tax ‘Lottery Ticket’
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Result: One form saved ~$1.7 Million. (Plus potential QSBS stacking).
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The Section 83(b) Election: The Startup Founder’s Tax ‘Lottery Ticket’
CORE INSIGHTS
- The Default Trap: Without an election, the IRS taxes restricted stock as it vests. If the price explodes, you owe Ordinary Income Tax (37%) on the massive gain.
- The Hack: The 83(b) Election lets you pay tax on the current (low) value at grant. Future growth is taxed at the lower Capital Gains rate (20%).
- The Deadline: You must file within 30 days of the grant. No exceptions. Missing this window costs millions.
Imagine winning the lottery but paying 37% tax before you get the cash. That’s what happens to founders without 83(b). This single piece of paper converts your sweat equity into a tax-favored asset.
The “Tax Basis” Freeze
- Grant Date: Value $1,000 ($0.01/share).
- Exit Date: Value $1,000,000 ($10.00/share).
- No Election: Tax on $1M @ 37% = $370,000.
- With 83(b): Tax on $1k @ 37% = $370.
*You prepay pennies to save a fortune.
What-If Scenario: The Unicorn Exit ($10M)
| Metric | Standard Vesting | 83(b) Strategy |
|---|---|---|
| Upfront Tax | $0 | $370 |
| Exit Tax | $3,700,000 (Income) | $2,000,000 (Cap Gain) |
| Total Bill | $3,700,000 | ~$2,000,370 |
Visualizing the Tax Savings
*Figure 1: Tax Liability. The Green bar (83b) is significantly lower due to the preferential rate shift.*
Strategic Action Steps
1
File Immediately
The clock starts on the grant date. Fill out the form (Name, SSN, Property Description). Do not wait.
The clock starts on the grant date. Fill out the form (Name, SSN, Property Description). Do not wait.
2
Use Certified Mail
Send via USPS Certified Mail with Return Receipt. This green card is your only proof of timely filing if the IRS loses it.
Send via USPS Certified Mail with Return Receipt. This green card is your only proof of timely filing if the IRS loses it.
3
Send Copies
Provide a copy to your employer and keep one for your records. Attach a copy to your tax return for that year.
Provide a copy to your employer and keep one for your records. Attach a copy to your tax return for that year.
The Bottom Line: Who Should Choose What?
- Do This: Founders/Early Employees receiving stock with very low value. The risk/reward is asymmetric.
- Avoid This: Receiving high-value RSUs in a public company if you fear the stock might drop (you can’t claim a refund).
Frequently Asked Questions
What is a Section 83(b) Election?
An IRS election to pay tax on the current value of restricted stock at grant, freezing the tax basis low.
Why is the 30-day deadline so critical?
The IRS is unforgiving. You must file within 30 days. No exceptions. Missing it costs millions.
What is the risk of filing?
If the company fails, you paid tax on worthless stock. But for early startups, the tax paid is usually trivial.
Disclaimer: 83(b) applies to restricted stock, not RSUs or Options. Consult a tax pro immediately upon grant.
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