Tax

The 83(b) Election: A 30-Day Filing That Decides How Your Startup Equity Is Taxed

The 83(b) election is a 30-day filing that can turn startup equity gains from ordinary income into capital gains. How it works, who qualifies, how to file.

By 409.AI Team - 2026-07-09

# The 83(b) Election: A 30-Day Filing That Decides How Your Startup Equity Is Taxed

You accept a founder grant, or you early-exercise a batch of options, and somewhere in the paperwork a lawyer mentions an "83(b) election." You have 30 days to file it. Miss that window and you can hand the IRS a tax bill many times larger than it ever needed to be. File it on time and you lock in today's rock-bottom valuation as your tax basis and start every capital-gains clock that matters to a founder. The stakes are that lopsided, and the decision is that fast.

Most people who own startup equity will face this choice exactly once per grant, under time pressure, usually while they're distracted by a hundred other things. Here's what the election does, who it's for, and why the number on your 409A report is what makes it work.

What an 83(b) election actually does

Start with the default rule. Under [Section 83 of the Internal Revenue Code](https://www.law.cornell.edu/uscode/text/26/83), when you receive stock that vests over time, the IRS doesn't tax you all at once. It taxes each chunk as it vests, using the fair market value on the day it vests. So if your shares are worth a penny today and $6 when they finish vesting four years from now, that appreciation gets treated as ordinary income, taxed at ordinary rates, and for employees it can carry payroll taxes too. You owe that tax as the stock vests, whether or not you've sold a single share.

The 83(b) election flips the timing. You tell the IRS, in writing, "tax me now, on the whole grant, at today's value, minus whatever I paid for it." Because a founder usually buys restricted stock at a price equal to its current fair market value, that spread is often zero or close to it. You pay little or no tax today. From that moment, the shares are a capital asset in your hands, and all the growth that follows is capital gain instead of compensation.

That single change of timing is the entire game. Ordinary income tops out at 37% federally. Long-term capital gains top out at 20%, plus the 3.8% net investment income tax. On a meaningful exit, the gap between those two treatments is the difference between keeping your equity and gifting a slice of it to the Treasury.

Who can file one, and who can't

The election only exists for property that is unvested when you get it. That narrows the field more than people expect.

Restricted stock subject to vesting is the classic case. Founder shares, early-employee restricted stock purchases, anything where you own the shares now but they can be clawed back if you leave before vesting. This is where an 83(b) belongs.

Early-exercised stock options qualify too. If your plan lets you exercise before vesting, you exercise, receive unvested shares, and file an 83(b) on them. Do it the day the grant is priced and the taxable spread can be zero.

Fully vested stock needs no election. It's already taxed at grant by default, so there's nothing to accelerate.

RSUs do not qualify. A restricted stock unit is a promise to deliver shares later, not property transferred to you today. There's nothing to make an election on until the units settle, at which point they're ordinary income and the window has closed on you before it opened. If your equity is RSUs, an 83(b) is not a tool you have.

Unexercised options don't qualify either. An option is a right to buy the stock, not the stock itself. You elect on the shares, after you exercise, not on the grant of the option.

The math, with real numbers

Take a founder who buys 2,000,000 shares of restricted stock at $0.0001 per share, a total of $200, at a point when the 409A fair market value is also $0.0001. The stock vests over four years.

File the 83(b) on time. Ordinary income today is fair market value minus price, or ($0.0001 − $0.0001) × 2,000,000, which is $0. Tax today is essentially nothing. Four years later the company is acquired at $8 a share. The founder has held the shares more than a year, so the entire gain, roughly ($8 − $0.0001) × 2,000,000, about $16 million, is long-term capital gain. Top rate: 23.8%.

Now run it without the election. Each year, 500,000 shares vest. Suppose the fair market value climbs to $0.50, then $2, then $4, then $6 across the four vesting dates. Every vesting event is ordinary income on the value at that moment, so the founder recognizes hundreds of thousands, then millions, of ordinary income across four years, taxed at up to 37%, and owes it in cash even though the shares can't be sold. The holding period for capital-gains purposes also keeps resetting with each vest. Same company, same exit, dramatically worse outcome, and a brutal cash-flow problem along the way.

The election didn't change how much the company was worth. It changed which tax rate applied to the growth and when the bill came due.

Why your 409A valuation is the number that makes this work

The whole strategy depends on the fair market value being low on the day you file. That value doesn't come from your last funding round. It comes from your [409A valuation](https://409.ai/articles/what-is-a-409a-valuation-a-comprehensive-guide), the independent appraisal of your common stock that also sets the strike price on your options.

Founders are often surprised that this number sits well below the price investors just paid. That's expected. A 409A values common stock, which lacks the liquidation preferences, protective provisions, and other rights that make preferred stock worth more, so [the 409A comes in lower than the post-money valuation](https://409.ai/articles/why-is-your-409a-valuation-lower-than-post-money-valuation) by design. A 409A valuation is a form of fair market value, but as we've covered in [409A vs. fair market value](https://409.ai/articles/409a-valuation-vs-fair-market-value), the two terms aren't interchangeable, and the distinction matters when you're documenting an 83(b).

That low common-stock value is exactly why an early 83(b) is so cheap. If you're an employee early-exercising options, the strike was set at the 409A price, so exercising and electing the same day can produce a zero spread. This is the practical reason the [409A directly shapes what your options cost you](https://409.ai/articles/understanding-409a-valuation-for-employees) and how the resulting shares get taxed. Getting the underlying valuation right, and keeping it current, is the foundation the whole election sits on, which is why founders treat their [409A as a startup essential rather than a box to check](https://409.ai/articles/409a-valuation-for-startups-what-you-must-know). If you need one, that's what our [409A valuation product](https://409.ai/products/409a) is built for.

The QSBS angle: starting the clock early

There's a second reason founders file even when the tax today is zero. An 83(b) starts your holding period at the moment of the grant, and that same start date begins the clock for qualified small business stock under Section 1202.

QSBS is one of the most valuable exclusions in the tax code, and it rewards holding stock long enough to qualify. Filing the election as early as possible means your clock starts as early as possible. The rules around the exclusion amount and the required holding period changed substantially under recent legislation, which we broke down in [what the One Big Beautiful Bill Act changed about Section 1202](https://409.ai/articles/qsbs-one-big-beautiful-bill-act-section-1202-changes). If QSBS is part of your plan, the 83(b) is the step that gets your holding period counting.

The 30-day rule is unforgiving, and now there's a form for it

The deadline is 30 days from the date the property is transferred to you, which is generally the date the board approves your grant, not the date you sign the paperwork or the date the shares show up in the cap table. The IRS does not grant extensions. Courts have refused to excuse late filings. There is no cure, no relief procedure, no "reasonable cause" exception. If you're on day 31, the election is gone.

Filing got cleaner in 2025. The IRS released Form 15620, the first standardized form for making a Section 83(b) election, replacing the custom letters founders and their lawyers used to draft by hand. As of July 2025, you can complete and submit Form 15620 online through the IRS website and receive instant confirmation, or download it and mail a paper copy. The move to a standard form removes a real source of drafting error, and multiple employee-benefits practices, including [Alston & Bird](https://www.alston.com/en/insights/publications/2025/08/irs-online-filing-section-83b-elections) and [Mintz](https://www.mintz.com/insights-center/viewpoints/2906/2025-07-29-new-electronic-filing-option-section-83b-elections), have flagged the online option as the lower-risk way to file.

Two things still hold. You must provide a copy of the filed election to your company. And if you file on paper rather than online, mail it certified with return receipt requested, so you have proof of the postmark date under the mailbox rule. Keep that confirmation somewhere you'll find it in five years, because you may need to show it when you sell.

The mistakes that cost people the election

The failures are almost always logistical, not analytical. Founders assume HR or the company files the election, but it's the shareholder's responsibility, not the company's. People count the 30 days from when they signed, not from the transfer date, and lose a week they thought they had. Someone with RSUs tries to file and can't, because there's no property to elect on. And plenty of people who filed correctly can't prove it years later because they never kept the confirmation.

None of these require tax expertise to avoid. They require treating the election as part of accepting the grant, with a hard deadline attached.

Bottom line

If you hold startup stock that vests, the 83(b) election is not a follow-up task, it's part of taking the grant. The day your grant is approved, put the 30-day deadline on your calendar counting from the transfer date. Confirm the fair market value on your most recent 409A so you know your spread. File Form 15620, online if you can, keep the confirmation, and hand a copy to your company. It's a few clicks and a small tax bill today, and as the difference between our two founders showed, skipping it can quietly cost you a large share of your own exit. The election is one of the rare moments in startup finance where the right move takes minutes and the wrong move can't be undone.

*This article is educational and not tax or legal advice. Confirm your specific situation and deadlines with a qualified tax advisor before filing.*