File your 83(b) election within 30 days to save thousands

Have you ever typed in an online coupon code at checkout and found out the code had expired? This is a similar situation to when you miss filing an 83(b) election. The 83(b) is the form you send to the Internal Revenue Service (IRS) to let them know that you would like to pay taxes on the price of equity at the time of granting rather than at the time of vesting, and this is one discount you don’t want to miss.  

Founders mostly choose to file 83(b) elections right away when they incorporate their company, betting that the price of their stock will go up in the future, and therefore filing the 83(b) election can save them thousands of dollars in taxes in the long run. Due to the importance of this election, we’ve rounded up everything you need to know about the process.

When do you file it?

Within 30 days of receiving shares of stock--usually the time you incorporate the company (for founders).

What is an 83(b) election?

An 83(b) election is a letter you send to the IRS to elect to recognize any tax payments associated with the stock immediately rather than waiting until the stock vests.

What are the consequences of not filing an 83(b) election?

You will likely pay more in taxes if you miss filing the 83(b) election within 30 days.

Let’s use a simple example to show the different tax amounts you will otherwise pay. As an example, let’s say you registered your company on January 1st with 1,000,000 shares at the value of $0.001/share. You also have a vesting period of 11 months and at that time your shares are valued at $0.20/share. You are in the 39.6% tax bracket.

First let’s learn two definitions:

Stock grant date: When you initially received the stock. In this case, January 1st.

Stock vesting: The waiting period to earn the stock options. In this case, December 1 st.

The tax differences:

83(b) election filed within 30 days:

Pay taxes when stock is granted on January 1st:

1,000,000 shares * $0.001/share * 39.6% = $396

83(b) election NOT filed within 30 days:

Pay taxes when stock vests on December 1st:

1,000,000 shares * $0.20/share * 39.6% = $79,200

You will thank yourself for filing the form within 30 days as you will save a lot of money in taxes.

How do I make a Section 83(b) election?

Usually you will ask your attorney to draft the form for you. If you’re curious what the form looks like, here is an example of the 83(b) election form from Stripe.

Pro tips on how to file this form:

This is a letter that is very important, and you will not want to lose it. I suggest you make 3 copies of this 83(b) election letter: one for IRS, one for your company, and one for yourself. Use certified mail from the USPS (the post office) as proof of the filing date. You should also request a return receipt.

Takeaway:

Filing an 83(b) election within 30 days of receiving stock can save you thousands of dollars in taxes. Be sure to consult your attorney or CPA if you have any further questions.