§83(b) Election: The 30-Day Rule That Founders Blow
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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What §83(b) Does (And Why It Matters)
- When you receive restricted stock (founder shares with reverse vesting, restricted stock awards (RSAs), or any property subject to a substantial risk of forfeiture), §83 says you're taxed *at vesting* on the FMV at that time, not at grant.
- For a founder, that's catastrophic: if you got founder stock at $0.0001/share and the company hits a $20M valuation 2 years later, your 'income' on each vesting tranche is the spread, at ordinary income tax rates, potentially 35-45%.
- The §83(b) election flips the timing: you elect to recognize the income *now* (at grant, when value ≈ what you paid), then any subsequent appreciation is taxed at *long-term capital gains* when you eventually sell. That's a 15-20 point tax-rate spread on millions of dollars of upside.
- Concrete: founder stock granted at $1,000 total cost. No §83(b): you owe ordinary tax on the spread each vesting cliff for 4 years. WITH §83(b): you pay tax on $0 today (since FMV ≈ purchase price), and the entire future gain is capital.
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