83(b) Elections For Dummies

First, a few basics:

  • If you have stock options, you do not need to file an 83(b) Election Form, unless you exercised the option early.
  • If you purchased/received founder’s stock and there are no restrictions, such as vesting, you do not need to file an 83(b) Election Form.
  • If you purchased/received restricted stock in a growing startup, you should probably (about 99% of the time) file an 83(b) Election Form.

Here is why you want to file an 83(b) Election:

  • If you think the value of your stock will increase, you will NOT be forced to pay taxes on “phantom income” each year.

Let’s give an example to show the consequences of not filing an 83(b) election:

  • You own 10% of the stock of your startup. It vests over 4 years, or 25% per year.
  • You purchased this stock for $100 (fair market value) on January 1 of Year 1.
  • During Year 1, the Company raised some outside financing that values the company at $10M.
  • At the end of Year 1, the value of the Company is $10M and the value of your stock is worth $1M.
  • You have about $250K in taxable income in Year 1 ( [value of Company at year-end, $10M less value of Company at beginning of year, $1K] * ownership percentage, 10% * vesting % in Year 1, 25%).
  • You owe about $100K in Federal and State taxes.
  • You will pick up additional taxable income in Year 2 through Year 4 if the value of the startup continues to increase.
  • You do not get any tax relief if the value of the Company decreases.
  • Remember, this “phantom income” is triggered just by the value of the Company increasing – not by exercising the options or selling the stock.

Here is how to file an 83(b) election:

  • Download the Sample 83(b) Election Form and Letter below.
  • Sign the 83(b) Election Form and letter and follow the instructions in the letter.
  • Mail the letter and 83(b) Election Form to the IRS address (see dropdown below for address) within 30 days after the stock grant (there is no relief if you file late).
  • Mail Certified Return Receipt Requested to prove timely delivery.
  • If you live in a community property state, your spouse also needs to sign the 83(b) Election Form.
  • Give a copy of the signed 83(b) Election Form to the Company.


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