Section 83(b) elections

A Section 83(b) election is a letter that lets the Internal Revenue Service (IRS) know you’d like to have your founder stock taxed at the time of your stock purchase rather than at the time of vesting. In many cases, a Section 83(b) election can save you a significant amount on your future taxes.

If you make a Section 83(b) election, most importantly, you won’t pay taxes when your stock vests. Instead, you choose to pay very little (if any at all) taxes at the time of stock purchase, and you won’t owe taxes until you actually sell your stock.

If you don’t make a Section 83(b) election, you could owe a large amount of taxes every time your stock vests, especially if the stock value has increased. You’ll also have to pay taxes when you sell your stock. For an example, see Tax impacts of a Section 83(b) election in detail.

Benefits of the Section 83(b) election for newly incorporated startups

Startup lawyers almost always recommend filing a Section 83(b) election if founders purchase their stock when the company is still at its early stage. If you recently incorporated your startup, you should consider making a Section 83(b) election for your founder’s stock if you expect your stock value to go up in the future and you plan to stay employed with your company until all of your stock vests. Not all stock is eligible for a Section 83(b) election, but if you’re incorporating your company with co-founders through Atlas, your company’s stock is eligible because it’s subject to vesting.

If you choose to not pay money for your stock, you and your company will need to pay taxes for the stock issuance. We recommend that you talk to your tax advisor if you don’t plan to pay money for your stock purchase.

Reasons not to file a Section 83(b) election

If you believe the value of your company’s stock will decrease by the time it vests, or if you think you might not be employed by your company until your stock vests, then you might not want to make a Section 83(b) election.

If you’re not a US taxpayer and don’t plan to be, there’s no benefit from making a Section 83(b) election. For more information, see Section 83(b) elections for non US residents.

Timing for Section 83(b) elections

Mail your election by no later than 30 calendar days after the stock is issued to you. There are no exceptions to this rule—this is a strict deadline.

The 30th day is calculated by counting every day (including Saturdays, Sundays, and holidays) starting with the day after the date that you’re issued the stock. For example, if you’re issued stock on April 10 that’s subject to a vesting schedule, your Section 83(b) election must be postmarked no later than May 10. If the 30th day falls on a weekend or holiday, then the deadline is the next business day.

Section 83(b) elections for non US residents

If you live outside the US but file US tax returns, you should still consider making a Section 83(b) election because the election might save you US taxes in the future.

If you don’t file US tax returns, but think you might become a US taxpayer in the future, you should still consider making a Section 83(b) election and applying for an ITIN. If you don’t make the election and later become a US taxpayer when the stock vests, you could be subject to additional US tax liability as your stock vests.

If you’re not currently, and don’t plan to become a US taxpayer, making a Section 83(b) election doesn’t matter because a Section 83(b) affects only US tax liability. For foreign filing instructions, see Filing Section 83(b) elections as a non-US founder.

How to file a Section 83(b) election

You make a Section 83(b) election by first completing and signing the Section 83(b) election form provided to you. You can download the 83(b) form and instructions. You can download the 83(b) form and instructions here.

Send the originally signed Section 83(b) election to the Internal Revenue Office with which you file your return by USPS Certified Mail with Return Receipt, within 30 days of the date of stock issuance. See the next section if you don’t have access to the USPS.

Optionally, we also recommend including a copy of the election with a self-addressed, stamped envelope when mailing the original signed election. The IRS usually returns the date-stamped copy of your election using the self-addressed envelope, which is the best (while not required) proof of having made a timely election.

Delivering your election without USPS

If you can’t access a USPS office, there are limited private delivery service alternatives that you can use to deliver your election to the IRS.

Next steps after mailing your election

Keep a copy of the signed Section 83(b) election form and the green-and-white Certified Mail Receipt (with the date stamp showing that you put it in the USPS mail within 30 days of the date of stock issuance). When the IRS mails back the date-stamped green card (and additional 83(b) election form copy if you sent one), keep those as proof of timely filing. If you’re using one of the private delivery services approved by the IRS, make sure to get a date-stamped receipt from them. We suggest taking photos of these and saving a digital version as well.

Also send a copy of the Section 83(b) election to your company. It can be as simple as emailing the photos to your company’s email address or saving them in your company’s digital folder (you can also use other methods that better suit you).

Steps to take if you didn’t retain proof of timely delivery

If you don’t retain proof of timely filing of the Section 83(b) election, it might be difficult to prove that you filed this election on time and that you should be taxed accordingly. Consult with your tax advisor for further advice in this situation.

Extending the election timeline or revoking after the election

If you fail to make a Section 83(b) election within the 30-day time period, you’re not allowed to make a late election.

After you make a Section 83(b) election, it can be revoked only under extremely limited circumstances. Specifically, the Internal Revenue Service Commissioner might consent for an election to be revoked within 60 days of the election if the election was made under a mistake of fact about the transaction.

Filing a Section 83(b) with co-founders

The Section 83(b) election is filed by an individual taxpayer, not by the company. Thus, each founder needs to make their own decision about whether to make an election and must file it for themselves. However, future investors might expect that all co-founders have filed a Section 83(b) election.

Whether to attach a copy of a Section 83(b) election income tax returns

After you mail the election to the IRS office where you regularly file your tax returns, you don’t need to submit the copy of the election again with your federal income tax returns. On your tax return, make sure you properly report your stock purchase.

Tax impact of a Section 83(b) election in detail, with an example

The election impacts when you owe taxes and the amount that you’re taxed on your founder’s stock.

Without a Section 83(b) election, you aren’t taxed at the time stock is issued to you. However, every time your stock vests in the future, you have to pay ordinary income taxes to the extent your stock value (often referred to as “fair market value”) has increased from the date you purchased your stock. When you sell your stock, you will owe capital gains tax on the difference between the value of your stock at sale and the value you were taxed on at vesting. (Capital gains tax rates on property held for more than one year are generally lower than ordinary income tax rates. The length of time you hold your stock is called the “holding period." If you don’t make a Section 83(b) election, your holding period begins when the stock vests.)

With a Section 83(b) election, you only owe ordinary income taxes at the time of stock issuance to the extent the value of the purchased stock is greater than what you pay. If you pay fully for your stock at the time of your stock purchase, you should owe no additional income taxes. This is because our stock purchase agreement template presumes your stock value equals the issuance price (also called par value), reflecting that your company doesn’t have significant assets in it yet. If your company is beyond the “raw idea” stage, when the stock value might be higher than the issuance price, you should consult with your tax advisor. When you later sell your shares, you’re taxed on the capital gains, which is the difference between the stock’s value per share when you sell it and the value when the stock was issued to you. Another advantage of making a Section 83(b) election is that your holding period begins earlier (when you’re issued the stock), which is typically a year earlier than when you vest the first round of the initial grant.

For example, your company issues you 200,000 shares valued at 0.0001 USD per share and you pay 0.0001 USD per share using cash. With an 83(b), you don’t have an income inclusion in the year the stock is issued as you paid for the value of the shares. If you don’t pay for the value of the shares using cash or other assets, a Section 83(b) election means you choose to include as ordinary income in the year the shares are issued the full value of the stock (20 USD). If half of your stock vests one year later and the other half vests two years later, you have no tax consequences because you made a Section 83(b) election. If 3 years from now you sell your stock for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 399,980 USD (400,000 USD minus 20 USD).

If you don’t make a Section 83(b) election, you don’t have tax consequences on issuance of stock subject to vesting. However, if the value of your shares is 0.50 USD per share when half vest in one year then you would pay ordinary income taxes on 49,990 USD (0.50 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If the value of your shares is 1.00 USD per share when the second half vest in two years from issuance then you would pay ordinary income taxes on 99,990 USD (1.00 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If you sell your stock in 3 years for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 250,000 USD (400,000 USD minus 20.00 USD paid for the shares, minus 149,980 USD).

Non-founder employees receiving stock subject to vesting are also eligible for a Section 83(b) election, but might have additional tax considerations at the time of stock issuance. We suggest they consult with their tax advisors before making the election.