83(b) Election Calculator

Section 83(a) is the default and it is unkind to anyone whose company succeeds. Restricted stock is not taxed when it is granted, because it is still subject to a substantial risk of forfeiture. It is taxed as each tranche vests, on the excess of the fair market value at that moment over what you paid, at ordinary rates. For an employee it is wages, so payroll tax applies too.

The cruelty is in the timing. Vesting happens on a schedule set years in advance; valuation happens on whatever the company is worth that day. A founder whose company is worth a hundred times more at year four than at grant is taxed at ordinary rates on that increase, in a year when the stock is still completely illiquid, with no way to sell shares to pay the bill.

Section 83(b) lets you volunteer to be taxed earlier, on the spread at grant instead. For a founder who buys shares at their formation-date fair value, that spread is zero — the election costs nothing, and every subsequent dollar of appreciation is capital gain rather than ordinary income. It is a single page of paper, filed within 30 days, that routinely changes the tax on an exit by seven figures.

The first is character. Without the election, appreciation between grant and each vesting date is ordinary income — up to 37% federally, plus Medicare, plus state. With it, that same appreciation is long-term capital gain. On a large grant in a company that works, the difference is most of the tax.

The second is the holding period. Without the election, each vesting tranche starts its own clock on its own vesting date, so an exit within a year of a vest produces short-term gain on that tranche, taxed at ordinary rates all over again. With the election, the clock starts at grant for every share.

The third is the one that most often dwarfs the others, and it does not appear in the arithmetic on this page. The five-year holding period for the section 1202 exclusion on qualified small business stock also runs from grant when an 83(b) election is made. For founder stock in a company that qualifies, that can be the difference between an exit that is entirely tax-free up to the per-issuer cap and one that is fully taxable — because without the election the clock on the last tranche would not start until year four.

None of the above makes the election automatic, and the reason is written into the subsection itself. If the property is later forfeited, "no deduction shall be allowed in respect of such forfeiture". The tax you paid at grant does not come back.

That produces a genuinely asymmetric bet whenever the spread at grant is not zero. Pay $59,025 of tax on a $150,000 spread, leave the company at eighteen months, and you have paid $59,025 for nothing — you can claim a capital loss on the cash you actually spent on the shares, but not a cent for the income you were taxed on. Meanwhile the person who did not file owes nothing, because unvested shares were never taxed in the first place.

So the question is not "does the election reduce tax" — at any decent exit price it does — but whether the amount put at risk is proportionate to your confidence in both the company and your own tenure. For a founder paying fair value at formation, nothing is at risk and the answer is obvious. For an employee joining at a $2 valuation, the up-front tax is real cash on an illiquid asset, and the break-even price on this page is the number to look at.

One caution about how much weight to put on the saving itself. It depends enormously on WHEN the valuation rises, not just where it ends up, because the default rule prices each tranche on its own vesting date. Take the founder grant in the first example, hold the $10 exit fixed, and vary only the path: a front-loaded rise makes the election worth about $975,000, a straight line about $648,000, and constant percentage growth from par value about $10,000. That is a hundredfold spread from one modelling assumption. The direction never changes — the election still wins — but anyone quoting a single figure for what it saves should be asked which path they assumed.

The election must be filed within 30 days of the transfer. Not 30 business days, not 30 days from the board consent, and not "with your return". The deadline is jurisdictional in practice — there is no relief for missing it, no late-filing procedure, and no argument about intent that has ever worked. The single most common way this goes wrong is a founder who meant to file, was busy, and looked up on day 35.

A few practical points that follow. File by certified mail with return receipt and keep it forever; the burden of proving timely filing is yours, and it may come up a decade later at diligence. Give a copy to the company, which needs it for payroll reporting. And note that an 83(b) election is for restricted STOCK — it is not available for restricted stock units, which are a contractual promise rather than transferred property, and which is why RSU holders have no equivalent choice.

Finally, the election is only worth making on stock that is genuinely subject to a substantial risk of forfeiture. Fully vested shares are taxed at transfer under section 83(a) anyway, and there is nothing for an election to accelerate.