Navigating equity compensation can be challenging, especially when it comes to understanding tax implications. One essential tax-saving tool for startup founders and employees dealing with equity compensation is the 83(b) Election. In this guide we will provide you with a detailed understanding of the 83(b) Election, including its benefits, potential risks, and the filing process, including:

Table of contents

What is an 83(b) Election and How Does it Work?

The 83(b) Election is a provision under Section 83(b) of the Internal Revenue Code that allows startup founders or employees who receive equity compensation to choose to pay taxes on the fair market value of their shares when granted, rather than when they vest. This can be advantageous if you anticipate a significant increase in the value of your shares or startup as a whole, and it could potentially result in tremendous tax savings if and when you sell your shares.

For example, let’s say a startup grants an employee 100,000 shares of restricted stock at $1 per share. If the fair market value of the shares increases to $5 per share by the time the stock fully vests, the employee would normally need to pay taxes on the difference between the initial grant price and the fair market value at the time of vesting, which would be $400,000. However, if the employee had made an 83(b) Election and paid taxes on the initial grant price of $100,000, they would only need to pay taxes on the difference between the initial grant price and the sale price of the stock, resulting in a tax bill of just $35,000 upon vesting, and $140,000 in savings.

See the chart below for a more visual representation of this example:

Example impact of 83(b) election

83(b) election Without an 83(b) election
Number of RSs issued 100,000 100,000
Taxable event At time of RS grant At time of RS vesting
FMV per share at time of grant $1.00 $1.00
FMV per share at time of vesting $5.00 $5.00
FMV of all shares at time of taxable event $100,000 $500,000
Taxes paid at taxable event (35% ordinary income tax rate) $35,000 $175,000


When is the Right Time for an 83(b) Election?

Many factors go into to any major financial decision, but here are just a few considerations when evaluating if an 83(b) Election might make sense for you:

Potential Drawbacks of an 83(b) Election

While making an 83(b) Election can be advantageous, there are also potential risks and drawbacks to consider, including:

Do All Types of Equity Qualify for an 83(b) Election?

Not all forms of equity are eligible for an 83(b) Election, and it’s crucial to consult a Harness Tax Advisor or other tax professional when considering an 83(b) Election in order to fully evaluate your specific situation and potential tax implications.

Strategies to Minimize Risks and Maximize Benefits

To minimize the risks associated with an 83(b) Election and optimize your tax savings, consider the following strategies:

How to File an 83(b) Election Form: A Step-by-Step Guide

Follow these steps and work with a Harness Tax Advisor or other tax professional to file an 83(b) Election form with the IRS:

  1. Fill out an 83(b) Election form, which can be found on the IRS website or obtained from your employer, your Harness Tax Advisor, or a tax professional.
  2. Mail in the completed form via certified mail with a return receipt to the IRS within 30 days of receiving the shares. Inquire about the appropriate IRS address for filing the 83(b) Election, as it may vary depending on your location. The certified mail with the return receipt will help you confirm that the IRS received the 83(b) form.
  3. Keep a copy of the completed form, the return receipt, and the mailing envelope with the 83(b) filing address for your records.
  4. Notify your employer about your 83(b) Election and provide them with a copy of the completed form.

The IRS Filing Deadline For an 83(b) Election

The deadline for filing an 83(b) Election is crucial. The election statement must be filed with the IRS no later than 30 days after the date of the grant. Failure to meet the 83(b) Election deadline may result in the loss of potential tax benefits associated with the election.

Frequently Asked Questions (FAQs)

  1. What if I miss the 83(b) Election deadline? If you miss the 30-day deadline for filing an 83(b) Election, you will not be able to take advantage of the potential tax benefits. You will be taxed on the fair market value of your shares as they vest.
  2. What happens if I leave the company before my shares fully vest? If you leave the company before your shares fully vest, any unvested shares will likely be forfeited. Unfortunately, you cannot claim a refund for taxes paid on those shares under an 83(b) Election.
  3. Can an 83(b) Election be revoked? An 83(b) Election is irrevocable without the consent of the IRS. Revoking an 83(b) Election is rare and generally only granted under exceptional circumstances.

Harness Wealth Can Help

As with any major financial decision, it’s crucial to consult a Harness Tax Advisor or other tax professional when considering an 83(b) Election. At Harness Wealth, our Tax Advisors are experienced in well-versed in 83(b) Elections and other equity compensation matters. Our experts can guide you through the entire process, from determining whether an 83(b) Election is right for you, to ensuring timely and accurate filing and maximizing tax savings. If you have equity compensation and are wondering if an 83(b) Election is right for you, book a one-hour Equity Tax Planning with a Harness Tax Advisor today.

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