Section 83(b) Elections for Startup Founders: A Tax-Time Bomb?

 

A four-panel educational comic titled "Section 83(b) Elections for Startup Founders: A Tax-Time Bomb?" Panel 1: A tax advisor says, “Consider making an 83(b) election…” while holding a cartoon bomb. Panel 2: A startup founder looks concerned and asks, “But won’t that trigger a big tax bill?” with a TAX notice in the background. Panel 3: The advisor explains, “No, you’ll pay tax on grant value now…” while pointing to a vesting chart. Panel 4: The found

Section 83(b) Elections for Startup Founders: A Tax-Time Bomb?

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What Is a Section 83(b) Election?

Section 83(b) of the Internal Revenue Code allows individuals who receive restricted stock to elect to pay income tax on the value of the stock at the time of grant, rather than when it vests.

This election is particularly relevant for startup founders and early employees who receive equity that vests over time.

If the value of the stock increases significantly, making the election early can result in huge tax savings.

How It Works for Startup Founders

Let’s say you’re granted 1 million shares of restricted stock at $0.001 per share, vesting over 4 years.

If you file an 83(b) election immediately, you pay ordinary income tax on the $1,000 value at grant.

Any future appreciation is taxed as capital gains, not ordinary income—potentially at a much lower rate.

Without the election, you’ll pay tax as each tranche vests—based on its value at the time, which could be far higher.

Tax Benefits of Filing an 83(b)

✔️ Locks in a low ordinary income tax base if the stock has low fair market value (FMV) at grant.

✔️ Starts the capital gains holding period immediately, potentially qualifying for long-term gains or even QSBS (Section 1202) benefits.

✔️ Reduces administrative headaches of tracking taxable income on each vesting event.

When 83(b) Backfires

⚠️ If the company fails or your stock never vests, you already paid tax on income you never realized.

⚠️ The IRS does not allow refunds for 83(b) elections—even if you walk away with nothing.

⚠️ If you overestimate growth and prepay taxes on worthless equity, it’s a real financial hit.

⚠️ The election must be filed within **30 days** of the stock grant—no exceptions.

How to File an 83(b) Election

1️⃣ Complete an 83(b) election letter with grant details, FMV, and stock type.

2️⃣ Send it to the IRS **within 30 days** via certified mail with return receipt.

3️⃣ Provide a copy to your employer for payroll reporting.

4️⃣ Keep a copy for your own tax records.

Pro tip: Some founders mail it **the same day as their grant** to avoid deadline stress.

Conclusion

Section 83(b) can be a brilliant tax move—or a ticking time bomb—depending on the future of your startup.

Done right, it offers early equity holders a low-cost way to reduce tax and maximize capital gains.

But it carries risk, and timing is everything. Always consult your tax advisor before pulling the trigger.

🔗 Related Resources

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Keywords: section 83b election, startup founder taxes, restricted stock, early equity strategy, capital gains tax planning