If you've received restricted stock awards (RSA) or early-exercised options, you're facing a critical 30-day decision that could save you thousands in taxes: whether to file an 83(b) election. In 2025, with equity compensation becoming more common, understanding this tax strategy is essential for startup employees, founders, and anyone receiving equity grants.
This comprehensive guide will walk you through exactly how much you can save with an 83(b) election, when it makes sense, and how to use our free calculator to make an informed decision. Whether you're a first-time equity recipient or a seasoned startup veteran, this could be the most important tax decision you make this year.
What is an 83(b) Election?
An 83(b) election is a tax strategy that allows you to be taxed on the fair market value (FMV) of your restricted stock at the time of grant, rather than when it vests. This election must be filed with the IRS within 30 days of receiving your equity grant.
The key benefit? If your company's stock appreciates significantly between grant and vesting, you could save substantial amounts on your tax bill by paying taxes on the lower grant-date value instead of the higher vesting-date value.
How 83(b) Elections Work
When you receive restricted stock, it typically comes with vesting conditions (like staying with the company for a certain period). Without an 83(b) election:
- You pay ordinary income tax on the FMV at vesting minus your purchase price
- Your tax basis becomes the FMV at vesting
- Future capital gains are calculated from the vesting FMV
With an 83(b) election:
- You pay ordinary income tax on the FMV at grant minus your purchase price
- Your tax basis becomes the FMV at grant
- Future capital gains are calculated from the grant FMV
- Your holding period for long-term capital gains starts at grant
When Does an 83(b) Election Make Sense?
An 83(b) election is most beneficial when:
| Scenario | 83(b) Election | No Election |
|---|---|---|
| Low FMV at grant, expected appreciation | ✅ Beneficial | ❌ Higher taxes |
| High FMV at grant, minimal appreciation | ❌ May not help | ✅ Better option |
| Early-stage startup with low valuation | ✅ Usually beneficial | ❌ Missed opportunity |
| Established company with stable stock | ⚠️ Evaluate carefully | ⚠️ May be fine |
Real-World Example: Startup Employee Scenario
Let's walk through a concrete example to show the potential savings:
Scenario Details
- Shares granted: 10,000 restricted shares
- Purchase price: $0.10 per share
- FMV at grant: $0.50 per share
- FMV at vesting (4 years later): $15.00 per share
- Expected sale price: $20.00 per share
- Ordinary income tax rate: 37%
- Long-term capital gains rate: 20%
Without 83(b) Election
At vesting, you would pay:
- Ordinary income tax: ($15.00 - $0.10) × 10,000 × 37% = $55,130
- Tax basis becomes $150,000
- Capital gains at sale: ($20.00 - $15.00) × 10,000 × 20% = $10,000
- Total tax: $65,130
With 83(b) Election
At grant, you would pay:
- Ordinary income tax: ($0.50 - $0.10) × 10,000 × 37% = $1,480
- Tax basis becomes $5,000
- Capital gains at sale: ($20.00 - $0.50) × 10,000 × 20% = $39,000
- Total tax: $40,480
Tax savings with 83(b) election: $24,650
You can use our 83(b) Election Calculator to run your own scenarios and see the potential savings.
Pros and Cons of 83(b) Elections
Advantages
- Potential tax savings: Can save thousands or even hundreds of thousands in taxes
- Earlier long-term capital gains: Your holding period starts at grant, not vesting
- Lock in low basis: If stock appreciates significantly, you lock in a lower tax basis
- Cash flow planning: Pay taxes upfront when you might have more cash
Risks and Disadvantages
- Irrevocable decision: Once filed, you cannot undo the election
- Upfront tax payment: You pay taxes on paper gains that may never materialize
- Forfeiture risk: If you leave before vesting, you lose both the stock and the taxes paid
- 30-day deadline: Miss the deadline and the opportunity is gone forever
- Complexity: Requires careful calculation and professional advice
How to Use Our 83(b) Election Calculator
Our free calculator makes it easy to compare scenarios and make an informed decision:
Step 1: Enter Your Equity Details
- Number of shares granted
- Purchase price per share
- Fair market value at grant
- Expected fair market value at vesting
Step 2: Add Tax Information
- Your marginal ordinary income tax rate
- Long-term capital gains tax rate
- Expected sale price (if known)
Step 3: Review Results
The calculator will show you:
- Tax with 83(b) election (paid now)
- Tax without 83(b) election (paid at vesting)
- Estimated savings or additional cost
- Detailed breakdown of all calculations
Try our 83(b) Election Calculator now to see how much you could save.
Key Considerations for 2025
Several factors make 83(b) elections particularly relevant in 2025:
Tax Rate Changes
With potential changes to tax rates, the timing of when you recognize income becomes even more critical. Higher future tax rates make 83(b) elections more attractive.
Startup Ecosystem Growth
As more companies offer equity compensation, understanding 83(b) elections becomes essential for employees at all levels.
Remote Work Considerations
With remote work becoming permanent, employees may have different tax situations that affect the 83(b) decision.
When to Consult a Professional
While our calculator provides valuable insights, you should consult a tax professional when:
- You have complex tax situations (multiple income sources, AMT considerations)
- Your company is in a unique industry or has special circumstances
- You're unsure about the FMV of your shares
- You have questions about the filing process
- You want to understand state tax implications
Filing Your 83(b) Election
If you decide to file an 83(b) election, here's what you need to do:
Required Documents
- Form 83(b) election statement
- Copy to your employer
- Copy to the IRS (filed with your tax return)
- Copy for your records
Timeline
- Day 0: Receive restricted stock grant
- Day 1-30: File 83(b) election (if desired)
- Day 31+: Election period expires
Common Mistakes to Avoid
- Missing the deadline: 30 days is firm - no extensions
- Incorrect FMV: Using wrong fair market value can invalidate the election
- Poor timing: Filing when stock is overvalued
- Ignoring state taxes: Some states don't recognize 83(b) elections
- Not considering AMT: Alternative Minimum Tax can affect the decision
Conclusion
The 83(b) election can be one of the most powerful tax-saving strategies available to equity recipients, but it's not right for everyone. The key is understanding your specific situation and making an informed decision within the 30-day window.
Our free 83(b) Election Calculator can help you quantify the potential savings and make a data-driven decision. Remember, this is a complex tax strategy that can have significant financial implications, so don't hesitate to consult with a qualified tax professional.
For more insights on equity compensation and tax planning, explore our ISO AMT Calculator and read our guide on Equity Compensation 101.
