83(b) elections: A guide for startup teams

An 83(b) election is a tax filing that lets you pay taxes on your startup equity now, while it's worth almost nothing, instead of later when the bill could be much larger. It takes about 15 minutes, you have 30 days to file it, and as of 2025 you can do it online.

At Cake, this is one of the first things that comes up when founders set up their equity. This guide covers what the 83(b) election is, who it applies to, how the tax math works, and how to file one.

What is 83(b) election?

An 83(b) election is a filing with the IRS that lets you pay income tax on restricted stock at the time you receive it, instead of when it vests.

The name comes from Section 83(b) of the Internal Revenue Code. In plain terms, you're telling the IRS: "Tax me now, while this stock is worth almost nothing, rather than later when it could be worth a lot more."

Here's why that matters. When a founder or employee receives restricted stock (meaning, stock that's subject to a vesting schedule), the IRS normally waits until each vesting event to tax you. At that point, you owe ordinary income tax on whatever the stock is worth. If the company has grown, that tax bill grows with it.

The 83(b) election changes the timing. Instead of being taxed at each vesting milestone, you pay the tax upfront on the stock's value at the grant date. For most early-stage founders, that value is a fraction of a cent per share. So the tax bill is tiny.

As the term implies, this an election, meaning you have to actively choose to do it. It's not automatic. And you must file within 30 days of the grant date. Miss that window and you're locked into the default tax treatment. No extensions.

How a section 83(b) election works

Say you receive a restricted stock grant or options as part of your compensation. If your grant allows early exercise, you can make an 83(b) election before the shares are fully vested. The election must be filed within 30 days of the grant date — miss that window and you lose the tax benefit.

The mechanics differ slightly depending on the type of equity.

Stock options (ISOs and NSOs)

When you exercise stock options, you typically owe tax on the spread between the fair market value and the strike price. For NSOs, that's ordinary income tax. For ISOs, it can trigger the Alternative Minimum Tax (AMT). If you early-exercise and file an 83(b) election, you accelerate the taxable event to a point when the spread is minimal or zero. As the shares continue to vest and appreciate, you avoid being taxed on that growth at ordinary income rates. Know the difference between ISO and NSO.

Restricted stock awards (RSAs)

RSAs are common in early-stage startups, often issued to founders and early employees. The value at grant is usually very low — often a fraction of a cent per share. Filing an 83(b) election at grant means you recognize that minimal value as ordinary income upfront, resulting in little to no tax liability at that point. When you eventually sell, you pay capital gains tax on the difference between the sale price and the value at grant.

Without the election, the spread between the FMV at each vesting date and your original purchase price is taxed as ordinary income — a much higher rate.

Who it applies to (and who it doesn't)

The 83(b) election applies to anyone receiving property subject to a "substantial risk of forfeiture" in exchange for services. In startup terms, that means stock with vesting conditions.

It applies to:

• Founders receiving restricted common stock. This is the most common scenario. You incorporate, issue yourself shares, and those shares vest over time — typically four years with a one-year cliff. The 83(b) election covers all of those shares from day one.
• Employees and advisors receiving restricted stock awards (RSAs). If your company grants actual shares (not options, not RSUs) to early team members with vesting conditions, those recipients can file an 83(b) election on their equity grant.
• Anyone early-exercising stock options. Some companies allow option holders to exercise their ISOs or NSOs before vesting. When you early-exercise, you receive actual shares still subject to vesting. The 83(b) election applies to those exercised shares.
  

It does NOT apply to:

• Restricted stock units (RSUs). This trips people up. RSUs are a promise of future shares, not actual shares. No property is transferred to you until vesting, so there's nothing to make the election on.‍
• Fully vested stock. No risk of forfeiture means no election to make.‍
• Stock purchased at fair market value with no vesting restrictions. Same idea — no forfeiture risk, no election.
  

If you're unsure which type of equity you've received, check your grant agreement or ask your company's legal counsel.

How the 83(b) tax math works

This is where the 83(b) election earns its reputation.

Without the election (default treatment)

Under the default rules, the IRS treats each vesting event as a taxable moment. When a portion of your shares vests, you owe ordinary income tax on the difference between what you paid for the stock and its fair market value at vesting.

Ordinary income tax rates in the US go up to 37%. And you owe the tax when shares vest, whether or not you've sold any stock. For founders of private companies, that means a tax bill with no easy way to generate the cash to pay it.

With the election

When you file an 83(b) election, you recognize all of the income upfront, based on the stock's value at the grant date. For early-stage founders, that value is often $0.001 per share or less.

From that point forward, any increase in value is treated as a capital gain. Hold the shares for more than one year before selling and you qualify for long-term capital gains rates — currently maxing out at 20%. That's roughly half the top ordinary income rate.

How much can an 83(b) save you? Here's an example.

Say you receive 1,000,000 shares of founder stock at incorporation. Fair market value is $0.001 per share. Your shares vest over four years.

With 83(b): You file within 30 days. Taxable income = $1,000 (1,000,000 × $0.001). At a 37% rate, you owe about $370. When you eventually sell — say after a Series A values shares at $2 — the gain is taxed as capital gains.

Without 83(b): Over four years, as shares vest, the IRS taxes you on the FMV at each vesting date. If shares reach $2 by year four, you could owe ordinary income tax on up to $2,000,000 in value. At 37%, that's up to $740,000 — and you haven't sold a single share.

$370 versus $740,000. That's the gap.

The difference between filing and not filing comes down to when you're taxed and at what rate. Here's a simplified example of how the numbers play out for a founder over a four-year vesting period.

These are simplified numbers for illustration. Your actual tax situation depends on your income bracket, the 409A valuation at each vesting event, state taxes, and other factors. A tax professional can walk you through the specifics.

As always, it's valuable to consult with a tax professional before making the election, as it can have complex tax implications.

It also starts the clock on QSBS

There's a second benefit that gets overlooked.

Filing an 83(b) election starts the holding period for Qualified Small Business Stock (QSBS) under Section 1202 of the tax code. Hold qualifying stock in a C-corporation for five or more years, and you may be able to exclude up to $10 million (or 10x your cost basis, whichever is greater) in capital gains from federal income tax.

The five-year clock matters here.

Without an 83(b) election, each vesting tranche starts its own separate holding period. Your year-one shares might qualify after five years, but your year-four shares wouldn't qualify until year eight. If there's an exit before all tranches hit the five-year mark, some of your gains may not be eligible for exclusion.

With the election, the clock starts on all shares at once from the grant date. Cleaner and more likely to get you to the five-year threshold when it counts.

QSBS has specific eligibility requirements beyond just the holding period. The company must be a domestic C-corporation with less than $50 million in gross assets at the time of issuance, among other criteria. A tax professional can help you figure out whether your situation qualifies.

Cake supports QSBS tracking. Cake's platform helps founders track QSBS eligibility, holding periods, and exclusion thresholds so you're always prepared when it's time to report. Learn more.

Risks worth knowing

The 83(b) election is a bet that your company will grow and that you'll stay long enough to benefit. For most founders at incorporation, it's a very small bet with large upside. But the downside exists.

You could pay tax on stock you never fully receive. Leave the company before vesting completes and you forfeit the unvested shares. The taxes you paid on those shares don't come back. For founder stock valued at a fraction of a cent, this risk is minimal. For later-stage grants at higher valuations, the exposure is different.

No deduction if the stock becomes worthless. If the company fails, you can't claim a tax deduction for the loss on the income you recognized when filing.

You need cash to pay the tax upfront. At early-stage valuations, this is typically under $500 for founders. If you're filing on shares with a meaningful FMV, the upfront bill could be substantial.

It's generally irrevocable. Once filed, you can't undo it without IRS consent, which is rarely granted.

What we see on Cake is that for founders receiving stock at or near incorporation, the upfront cost is negligible and the potential upside is significant. The calculation shifts when fair market value is already meaningful — say, after a priced round. In those cases, it's worth running the numbers with a tax advisor before filing.

When to file (and when to think twice)

Not every equity grant calls for an 83(b) election. Here's how founders we work with tend to approach it.

Filing usually makes sense when: The FMV is near zero. Founder stock at incorporation is the clearest example — the upfront tax is negligible and the potential savings are significant. Early employee RSAs issued at low valuations follow the same logic. So do early-exercised stock options where the spread between the exercise price and FMV is minimal.

Worth more thought when: The FMV is already substantial. A grant issued after a Series A, for instance, could mean a meaningful upfront tax bill. You're also betting that you'll stay through the full vesting period and that the stock will appreciate further. Grants with performance-based vesting add another layer of uncertainty, since the shares may never vest at all.

The election doesn't apply when: The equity is in the form of RSUs, the stock is already fully vested, or the stock was purchased at FMV without vesting conditions.

Every founder's situation is different. These are patterns we observe, not recommendations. Your tax professional can help you evaluate the specifics.

How to file an 83(b) election

The process is simple. As of 2025, the IRS accepts electronic filings, which makes it even easier.

The critical rule: you have exactly 30 days from the grant date. Not 30 business days. Thirty calendar days. The grant date is typically when the board approves the issuance, which can be days or weeks before you receive paperwork. Your cap table should have this date.

Step 1: Know your grant date

The 30-day clock begins on the date the stock is transferred to you. If you're unsure of the exact date, ask your company's counsel.

If you're on Cake, you don't need to guess. Cake's 83(b) tool alerts shareholders and option holders (when early-exercising) 30 days before the filing deadline, so the window never sneaks up on you.

Step 2: Prepare your election statement

An 83(b) election is a written statement containing specific details about your grant. The IRS requires it to include your name, address, and taxpayer identification number; a description of the property (company name, number and type of shares, and any restrictions); the grant date; the fair market value at the time of transfer; the amount you paid (if any); and a declaration that you're making the election.

The IRS released Form 15620 in November 2024 as a standardized template for this statement. You can use it, or you can prepare your own written statement that includes all the required information. Both are accepted.

On Cake, shareholders can download the form directly from the platform, ready to complete and file.

Step 3: File it — online or by mail

You have two options:

File online: Eligible individual taxpayers can submit their 83(b) election electronically through the IRS Online Account system. Log in (ID.me verification is required), complete or upload your election statement, and submit. You'll receive confirmation of submission.

File by mail: Print and sign your election statement and mail it to the IRS service center where you file your tax return. Send it via certified mail with return receipt requested — this is your proof of timely filing, and many attorneys still recommend this method for exactly that reason.

Both methods are valid. The content requirements of the election statement are the same either way. The filing must still happen within 30 days.

Step 4: Give a copy to your company

You're required to provide a copy of the completed election to the company that issued the stock, regardless of how you file. The company needs it for tax reporting.

Step 5: Keep your records

Save your confirmation of submission (or certified mail receipt), a copy of the filed statement, and any related grant documentation. You'll reference these when filing your annual tax return, and you'll want them available if there's ever an audit. Note that state tax requirements, if any, are separate from the federal filing.

Common mistakes to avoid

The 83(b) election is simple in concept. Small errors in execution can be expensive.

Missing the 30-day deadline. No extensions, no exceptions, no remedies. The most common reason founders miss it: they think the clock starts when they receive paperwork, not when the board approved the grant. These dates can be days or weeks apart.

Not keeping proof of filing. Without a confirmation receipt from e-filing or a certified mail return receipt, you have no evidence that you filed on time. This becomes a real problem during an audit.

Filing for RSUs. The election doesn't apply to restricted stock units. Filing one for RSUs is ineffective and creates confusion in your company's records.

Forgetting to give a copy to the company. This is a filing requirement, not optional. The issuing company needs it for compliance.

Skipping the tax professional. The filing itself is simple, but the downstream implications depend on your specific tax situation — income level, state taxes, AMT exposure, QSBS eligibility. A short conversation with a CPA before filing can save you from mistakes that are harder to fix later.

At Cake, the 83(b) tool automatically alerts shareholders and option holders when the filing window opens, so founders and their teams always know when to act.