Equity subject to vesting is taxed at each vesting event by default under the Internal Revenue Code (IRC), and for a fast-appreciating startup that quietly converts low-rate capital gains into high-rate ordinary income. One tool changes this. The 83(b) election lets you pay tax at grant instead, and it carries a hard 30-day deadline with no extensions. The rule is set out in 26 U.S. Code §83.
Three readers need this most: founders holding restricted stock awards (RSAs) at formation, employees who early-exercise options, and limited liability company (LLC) members holding profits interests. This guide covers the mechanics, a worked savings example, and when to file (and when not to).
What Is an 83(b) Election?
An 83(b) election is a choice under Section 83(b) of the IRC to be taxed on restricted equity at grant, on fair market value (FMV) minus the amount you paid, instead of at each vesting event under the §83(a) default. It applies while the shares carry a substantial risk of forfeiture (SRF), meaning they can still be lost if you do not meet the vesting conditions. Once that risk lapses, there is nothing left to elect.
Do I Need to File an 83(b) Election?
If you received near-zero-FMV founder stock subject to vesting, filing is close to a no-brainer, because the tax cost now is tiny and the upside is large. It may not be worth it if the FMV is already high, your cash for the tax is short, or forfeiture risk is real. Restricted stock unit (RSU) holders cannot file at all.
| Situation | File an 83(b)? | Why | Source |
|---|---|---|---|
| Founder RSA at formation (FMV ≈ price paid) | Strong yes | Near-$0 tax now, locks capital gains on all appreciation | IRC §83 |
| Early exercise with real cash outlay | Maybe | Weigh the cash tax and forfeiture risk against the upside | IRC §83 |
| High spread at grant | Think hard | Large upfront tax on illiquid stock | IRC §83 |
| Already-vested equity (no SRF) | No | The §83(a) default already taxes you at transfer | IRC §83 |
| RSUs | Cannot | No property transfers at grant | IRC §83 |
How Much Can an 83(b) Election Save? A Worked Example
An 83(b) election can convert millions of dollars of ordinary income into lower-rate capital gains for a founder whose shares appreciate. The table below models a founder with 1,000,000 restricted shares bought at $0.0001 ($100 total) on a four-year vest. The share figures are illustrative; the tax rates are 2025 tax-year amounts, sourced in the rate table that follows.
| Item | With 83(b) election | Without 83(b) election |
|---|---|---|
| Shares granted | 1,000,000 | 1,000,000 |
| FMV at grant ($0.0001/share) | $100 | $100 |
| Price paid | $100 | $100 |
| Ordinary income at grant | $0 | $0 (nothing filed) |
| Tax at grant | $0 | $0 |
| Shares vest over 4 years, rising to $5.00/share | Not taxed at vesting | Ordinary income as each tranche vests |
| Ordinary income recognized over vesting | $0 | ~$5,000,000 (up to 37% ≈ $1.85M tax) |
| Sale at $10.00/share | ~$10M gain, taxed at long-term capital gains | Gain over vesting-date basis, mixed holding periods |
The punchline: without the election, the founder turns future upside into ordinary income and owes tax before any liquidity exists. The magic works only when FMV is close to the purchase price at grant; the bigger the spread, the weaker the case. An early employee who early-exercises non-qualified stock options (NSOs) at a $1.50 spread pays real tax now on illiquid stock, and forfeits that tax if they leave before vesting.
| 2025 tax-year rate | Figure | Source |
|---|---|---|
| Long-term capital gains (LTCG) | 0% / 15% / 20% | IRS Topic 409 |
| 0% LTCG ceiling | Up to $48,350 single / $96,700 married filing jointly (MFJ) | IRS Rev. Proc. 2024-40 |
| 20% LTCG threshold | Above $533,400 single / $600,050 MFJ | IRS Rev. Proc. 2024-40 |
| Top ordinary income rate | 37% above $626,350 single / $751,600 MFJ | IRS Rev. Proc. 2024-40 |
| Net Investment Income Tax (NIIT) | 3.8% above $200,000 single / $250,000 MFJ modified AGI | IRC §1411, IRS |
| California top marginal rate | 13.3% (12.3% bracket plus 1% surcharge over $1M); gains taxed as ordinary income | California FTB 2025 rate schedules |
How Is an 83(b) Election Taxed?
With an 83(b) election, tax lands at three moments: ordinary income at grant on FMV minus price paid (often $0 for founders buying at FMV), nothing further at vesting, and capital gain at sale over a basis equal to FMV at grant. The long-term capital gains holding period starts at the grant date, so all appreciation held more than one year qualifies for LTCG rates.
Without the election, the holding period restarts at each vesting tranche, so every tranche needs its own clock exceeding one year to qualify for LTCG, and appreciation between grant and each vest is taxed as ordinary income.
| Moment | With 83(b) election | Without it (§83(a) default) |
|---|---|---|
| At grant | Ordinary income = FMV − price paid (often $0) | No tax; nothing filed |
| At each vesting event | No further ordinary income | Ordinary income on FMV − price paid at each vest |
| Cost basis | FMV at grant | FMV at each vesting date |
| LTCG holding period | Starts at grant date | Restarts at each vesting tranche |
| At sale | Capital gain over grant-date basis | Gain over vesting-date basis, mixed holding periods |
Source: 26 U.S. Code §83.
Which Equity Qualifies for an 83(b) Election?
RSAs and early-exercised incentive stock options (ISOs) or NSOs qualify, because actual shares transfer while still subject to vesting. Profits interests take a protective filing. RSUs never qualify: an RSU is an unfunded contractual promise to deliver shares after vesting, so no property transfers at grant and §83 never attaches. There is nothing to elect on.
| Equity type | 83(b) eligible? | Mechanism | Source |
|---|---|---|---|
| Restricted stock award (RSA) | Yes | Actual shares transfer at grant, subject to vesting | IRC §83 |
| Early-exercised ISO/NSO | Yes, if shares stay subject to vesting after exercise | Exercise converts the option into restricted stock | IRC §83 |
| Profits interest (LLC) | Protective filing | Often $0 value at grant; filing locks it in | Rev. Proc. 93-27 / 2001-43 |
| Restricted stock unit (RSU) | No | Unfunded promise to deliver shares later; no property at grant | IRC §83 |
Can You File an 83(b) Election for Early-Exercised ISOs and NSOs?
Yes, if your plan permits early exercise and the shares stay subject to vesting after exercise. For NSOs, the election fixes ordinary income at the exercise spread, often $0 if you exercise at grant-date FMV. For ISOs, the election operates for alternative minimum tax (AMT) purposes, and early exercise at a zero spread can eliminate the AMT hit that a later exercise would trigger.
The trade-off is cash. Early exercise means paying for the shares now, and if you leave before vesting and forfeit them, that cash and any tax paid are exposed. Model the outlay before you commit.
Do Profits Interests in an LLC Need an 83(b) Election?
A properly structured profits interest is generally not taxed at grant under the Revenue Procedure 93-27 and 2001-43 safe harbors, so the 83(b) here is a protective, belt-and-suspenders filing. It guards against the safe harbor failing or the interest being recharacterized later on higher value. This is a real 83(b) election, not an “83(b)-type” one. The area is complex and interacts with partnership tax rules, so work with a tax advisor and clean entity structuring from the start.
How Do You File an 83(b) Election With the IRS?
File within 30 days of the transfer date in seven steps: confirm eligibility, complete the form, verify FMV, sign, submit, copy your company, and keep your records. As of 2026, the IRS accepts electronic submission of Form 15620 through an IRS Online Account, in addition to paper mail.
- Confirm your equity is eligible (RSA or early-exercised shares still subject to vesting).
- Complete IRS Form 15620, which the IRS released on November 7, 2024 as the first standardized 83(b) form (current revision 4-2025). A self-drafted letter is still permitted.
- Verify FMV against board-approved pricing and confirm the grant date.
- Sign and date the election under penalty of perjury.
- File with the IRS: electronically through an IRS Online Account, or by mail to the service center where you file your Form 1040 (address in the Form 1040 instructions). The IRS confirms both methods in its Publication 525 update for the §83(b) election.
- Give a copy to your company or service recipient.
- Keep your copy permanently to substantiate basis at sale.
| Required in your election | Detail |
|---|---|
| Name, address, TIN | Taxpayer identifying information |
| Property description | e.g., 1,000,000 shares of common stock of [Company] |
| Transfer date and taxable year | The grant or purchase date |
| Restrictions | Vesting schedule and substantial risk of forfeiture |
| FMV at transfer | Determined without regard to lapse restrictions |
| Amount paid | The purchase price |
| Amount included in income | FMV minus amount paid |
| Employer-copy statement | Confirmation a copy went to the company |
| Signature and date | Signed under penalty of perjury |
Source: Treasury Regulation §1.83-2 and IRS Form 15620. For grants after December 31, 2015, you no longer attach a copy of the election to your annual federal return, per the IRS final regulations issued in 2016 (TD 9779).
What Is the 30-Day Deadline for an 83(b) Election?
The deadline is 30 days from the date the property is transferred (the grant or purchase date), not from vesting and not from signing your offer letter. There are no extensions and no hardship exceptions, and §9100 relief generally does not apply to 83(b) elections. Two timing rules govern the mechanics of proving you filed on time.
| Rule | What it means | Source |
|---|---|---|
| 30-day deadline | File within 30 days of transfer; no extensions | Treas. Reg. §1.83-2(c) |
| Mailbox rule | Postmark date counts as the filing date | IRC §7502 |
| Certified mail proof | Certified receipt date equals the postmark; the receipt is prima facie evidence of delivery | Treas. Reg. §301.7502-1 |
| Weekend/holiday relief | If day 30 is a Saturday, Sunday, or legal holiday, the next business day is timely | IRC §7503 |
| USPS postmark risk | From December 24, 2025, a machine postmark reflects first automated processing, not your drop-off date | USPS Domestic Mail Manual §608.11 |
Use USPS Certified Mail with Return Receipt so the postmark is provable, and do not gamble on day 30. The new USPS postmark rule means a last-day mailing can be stamped after the deadline.
What Happens If You Miss the 83(b) Deadline?
If you miss the 30-day window, the election is lost permanently and the §83(a) default applies. You recognize ordinary income at each vesting event on the FMV at that date, appreciation between grant and vest is taxed at ordinary rates, and the LTCG holding period restarts at each tranche. There is no late-filing mechanism.
The individual files the election, not the company, and a common miss is assuming the company handles it. Any restructuring workaround, such as a cancel-and-regrant, needs counsel and is not something to attempt solo.
What Are the Risks of Filing an 83(b) Election?
The main risk is prepaying tax on value you may never realize. If you forfeit unvested shares after filing, the tax paid is generally not refundable and no deduction recovers it under §83(b)(2). Startup equity is illiquid, so you can owe cash tax on shares you cannot sell. If the company fails or the value falls, the upfront tax is sunk. Understated FMV also creates exposure if the IRS disagrees on valuation.
How Does an 83(b) Election Interact With QSBS (Section 1202)?
For founders, the 83(b) election starts the stock holding period at grant, which also starts the five-year clock for the qualified small business stock (QSBS) exclusion under IRC §1202. That exclusion can shield the greater of $10 million or 10 times your basis from federal capital gains tax, subject to eligibility. QSBS requires C-corporation stock, which ties equity strategy to your entity type and Form 1120 filings. Without the election, each tranche’s QSBS clock starts at vest.
How Commenda Helps Founders With Startup Equity and Tax Compliance
Commenda gives founders certainty that the tax and entity groundwork behind their equity is handled. Commenda’s tax and accounting platform keeps corporate tax filings and audit-ready documentation in order as the company grows, and its incorporation service sets up clean equity and entity structures from day one, including the Delaware C-corporation structure that QSBS eligibility depends on. Track the 30-day window and other post-incorporation deadlines with Commenda’s compliance calendar, and see the US corporate tax overview for the entity-level context.
This guide is general information, not tax or legal advice. Consult a qualified advisor before filing, especially on profits interests, AMT, and QSBS.
Book a demo to get your founder equity and tax setup reviewed before your next grant: https://www.commenda.io/book-a-demo.
