What Is an 83(b) Election?

When you receive equity compensation, such as restricted stock in a startup or ownership interests in connection with an acquisition, the timing of when you pay taxes on those shares can significantly impact your overall tax bill. That’s where a Section 83(b) election comes in.

At its core, an 83(b) election is a tax choice you make with the Internal Revenue Service (IRS). Instead of waiting to pay taxes as your equity vests, you choose to be taxed up front when it is granted to you.

For founders, searchers, and buyers structuring deals with vesting or reverse vesting, this decision can have meaningful long-term consequences.

Why This Matters

Under the default tax rules, if you receive restricted stock or other equity that vests over time, you pay ordinary income tax on the fair market value of the shares as they vest. If the company’s value increases significantly, you could face substantial tax bills on income you have not actually realized in cash.

In an M&A context, this often arises when a buyer’s equity is subject to vesting conditions tied to continued service, performance milestones, or investor requirements. As the business grows post-closing, the value of that equity may increase, triggering higher taxable income at each vesting date.

With an 83(b) election, you elect to include the value of the equity in your income at the time of grant, when the valuation is typically lowest. You also begin your holding period earlier. Any future gain when you sell the shares may qualify for long-term capital gains treatment, which is usually taxed at a lower rate than ordinary income.

How It Works in Practice

Imagine you are acquiring a business and receive equity that is subject to reverse vesting over four years. At closing, the equity reflects the purchase price and current fair market value.

• Without an 83(b) election: You pay ordinary income tax on the value of the equity as it vests. If the company performs well and increases in value after closing, each vesting event could create additional ordinary income tax exposure.

• With an 83(b) election: You pay ordinary income tax once, based on the value at the time of grant. After that, your cost basis is set. Future appreciation is generally taxed at capital gains rates when you sell.

  
  

For buyers who expect to create value through operational improvements, growth initiatives, or multiple expansion, this distinction can be significant.

Who Typically Should Consider an 83(b) Election

An 83(b) election is commonly relevant for:

• Startup founders receiving restricted stock at formation

• Early employees with early exercise rights

• Self-funded searchers or sponsor-backed buyers whose equity is subject to vesting or reverse vesting

• Management teams receiving incentive equity in connection with a transaction

  
  

Not all equity is eligible. For example, standard restricted stock units (RSUs) generally do not allow an 83(b) election because the shares are not transferred until they vest.

Risks to Consider

An 83(b) election is not always the right choice. Key risks include:

• Forfeiture risk: If you leave the company or do not satisfy vesting conditions, you may lose the equity. Taxes already paid are generally not refunded.

• Valuation risk: If the company’s value decreases after you make the election, you may have paid tax on a higher value than the equity ultimately justifies.

• Cash flow considerations: You may owe tax before there is any liquidity event, which can be particularly challenging in closely held businesses.

  
  

Because of these risks, the decision should be evaluated carefully with both legal and tax advisors, especially when equity terms are negotiated as part of a transaction.

Timing and Filing Requirements

The IRS gives you 30 days from the date the equity is transferred to file your 83(b) election. There are no extensions or exceptions to this deadline. If you miss it, the opportunity is lost.

To properly file:

1. Prepare the election statement. The IRS now provides Form 15620, which may be used for 83(b) elections.

2. Mail the election to the appropriate IRS address within 30 days of the grant date.

3. Provide a copy to the company so compensation can be reported correctly.

   
   

The election must include specific information, such as your name, taxpayer identification number, description of the property, date of transfer, fair market value at transfer, and the amount paid for the equity.

Bottom Line

An 83(b) election can be a powerful tax planning tool for founders and acquisition entrepreneurs alike. When equity is granted at a relatively low valuation and there is meaningful upside potential, the election may significantly reduce overall taxes and better align tax treatment with value creation.

However, because it accelerates income recognition and involves real risk, it should be addressed early in the deal process and coordinated with your tax advisor before closing or issuance of the equity.