What Is an 83(b) Election (and Should You File One)?
If you’ve received Restricted Stock Awards (RSAs) or early-exercise stock options, one of the most powerful (and most misunderstood) equity compensation strategies is the 83(b) election.
When used wisely, and when your company stock performs well, filing an 83(b) election can save you a lot in taxes. But it’s not without risks.
What’s an 83(b) Election?
An 83(b) election lets you pay tax on the value of your shares when they’re granted instead of waiting until they vest.
This strategy is only available for RSAs or early-exercised stock options (not RSUs), but when it’s the right fit, it can make a meaningful difference.
Here are the two main benefits:
You pay tax now, potentially at a lower valuation.
If your company is growing, the stock price will likely rise over time. Paying tax on the lower value today could mean paying a lot less in total tax than if you waited to pay on the future (and hopefully much higher) value at vesting.You start the long-term capital gains clock sooner.
Filing an 83(b) election starts your holding period for favorable long-term capital gains treatment, rather than the higher short-term rate.
Why an 83(b) Election Isn’t Always a Win
Sounds great, right? So, what’s the catch?
There are two big risks you need to consider:
If you leave before your shares vest, they don’t belong to you and you can’t get your tax money back. The IRS doesn’t offer refunds just because the plan didn’t work out.
If the stock drops in value after you file the election, you still pay tax based on the higher value at grant. You don’t get to “undo” the election if the price goes down.
That’s why you need to be thoughtful before filing an 83(b) and why it can make sense to only file on a portion of your award.
A Real-Life Example
Let’s walk through an example of how this works.
May B. Rich joins an early-stage startup and is granted 25,000 RSAs, vesting over 4 years. The 409A valuation is $1/share. She considers filing an 83(b) but isn’t sure if she’ll stay long enough for all the shares to vest.
May decides to file an 83(b) on 50% of her RSAs, the shares vesting in the first two years. That means she’ll include $12,500 in income this year and pay about $4,375 in tax (assuming a 35% total tax rate).
Three years later, the company is acquired for $25/share. She’s still employed, so 75% of her shares have vested, but the final 25% won’t vest in time to be included in the buyout.
Let’s compare the outcomes:
Even though the 2028 shares technically had higher value when sold, the taxes wiped out the difference. In fact, May came out ahead by filing the 83(b) election for her earlier vests.
But here’s the key: She didn’t know this outcome ahead of time. The company could have folded. Had she filed an 83(b) on the full award, she would’ve paid $8,800 in taxes on shares that never vested.
Final Thoughts
Equity compensation is full of uncertainty. You don’t know what the company stock will do or how long you’ll stay. That’s why strategies like the 83(b) election need to align with your values, your risk tolerance, and your long-term goals.
Filing the 83(b) election can lead to a big win, but only if the stars align. If you’re considering it, make sure you understand the tradeoffs and have a plan for the risks.
Need help making the decision? That’s what I’m here for.