TL;DR (Too Long; Didn't Read)
What it is: A simple letter to the IRS that freezes the tax value of your founder shares at the time of grant.
The Deadline: Exactly 30 days from the date you are granted restricted stock. No exceptions. No extensions.
The Risk: If you miss it, you will owe ordinary income tax on the increased value of your shares every time they vest, even if you haven't sold a single share.
The Symptoms: You Just Founded a Company
You’ve just incorporated. You’ve allocated yourself 4,000,000 shares of restricted stock at a par value of $0.0001. You’re focused on hiring, product-market fit, and your first raise.
Tax is the last thing on your mind because your shares aren't "worth" anything yet. You assume that since you haven't sold anything, there is nothing to report to the IRS.
This assumption is the most expensive mistake a founder can make.
If your stock is subject to vesting (a "substantial risk of forfeiture"), the IRS doesn't consider those shares "yours" until they vest. Without an 83(b) election, the IRS waits for your company to become successful—and then they come for their cut of that success at the highest possible tax rates.
A Tale of Two Founders: The $2.4 Million Penalty
To understand why the 83(b) election is the "Golden Ticket" of Silicon Valley, look at two founders, Sarah and Mike. Both start "NextGen AI" and receive 1,000,000 shares at $0.01 per share ($10,000 total value). Both have a 4-year vest.
Founder A: Sarah (The Filer)
Sarah files her 83(b) election on Day 10. She tells the IRS, "I want to be taxed on the full $10,000 today." Since she paid $10,000 for the shares, her tax bill is $0.
Three years later, NextGen AI hits a Series B. Her shares are now worth $10.00 each. $10,000,000 of wealth has been created. Because of her 83(b) filing, she owes $0 in taxes during the vest. When she eventually exits, she pays the lower Long-Term Capital Gains rate (20%) on the growth.
Founder B: Mike (The Missed Window)
Mike gets busy. He forgets the 30-day window. Three years later, when his shares vest at the $10.00 valuation, the IRS treats that $10,000,000 as ordinary income.
Even though Mike hasn't sold any shares and has no cash to pay the bill, the IRS demands tax on the $10M gain. At a 37% federal bracket + state taxes, Mike owes over $4,000,000 in taxes on shares he can’t even sell yet. If he can't pay, he faces penalties, interest, and the potential liquidation of his stake just to satisfy the tax man.
The Technical Deep Dive: Why Section 83(b) Exists
Under Section 83(a) of the Internal Revenue Code, property granted in connection with services is taxed at the time it is no longer subject to a "substantial risk of forfeiture" (i.e., when it vests).
The Default Path (No 83(b)):
Grant Date: No tax (usually).
Vesting Dates: You are taxed on the "spread" between what you paid and the Fair Market Value (FMV) at the time of each vest.
Tax Rate: Ordinary Income (up to 37%).
Holding Period: Your 1-year clock for Long-Term Capital Gains starts only after each vest.
The 83(b) Path:
Grant Date: You "elect" to be taxed on the FMV of all shares today.
Vesting Dates: Tax-free. The IRS ignores the vesting schedule.
Tax Rate: You pay $0 today (if you bought shares at FMV). All future growth is Capital Gains.
Holding Period: Your 1-year clock for Long-Term Capital Gains starts the day you file the election. This is crucial for meeting QSBS (Qualified Small Business Stock) requirements, which can potentially eliminate up to $10M in federal capital gains tax entirely.
The "30-Day Hard Stop"
The IRS is notoriously cold-blooded about the 83(b) deadline. It is 30 days from the date of the grant, not 30 days from when you received the paperwork or 30 days from the end of the month.
No "Oops" Clause: If you miss it by one day, there is no way to fix it.
The Mail Trap: You must send it via USPS Certified Mail with a Return Receipt. If the IRS loses it and you don't have that receipt, they will assume you never filed.
The Board Trap: If your board approves your stock grant on January 1st, but you don't sign until January 15th, your 30-day clock likely started on January 1st.
The Expensive Mistake: The "Dry Tax" Crisis
The biggest danger for founders who miss the 83(b) election is phantom income.
In a successful startup, the FMV of your stock increases exponentially between your Seed round and your Series C. If you are vesting shares during those years without an 83(b), you are generating a tax bill that can easily reach six or seven figures.
Because you are a private company founder, your stock is illiquid. You cannot sell shares on the open market to pay the IRS. This puts founders in a "death spiral" where they have to take out predatory loans or beg their board for a secondary sale just to pay taxes on "wealth" that only exists on paper.
Beyond the Election: The Founder’s Exit Strategy
Filing your 83(b) is just the first step in a long-term tax strategy. As a founder, your goal isn't just to build a great company; it’s to ensure that the wealth you create actually reaches your bank account.
Many founders wait until an acquisition or IPO is "imminent" to start thinking about taxes. By then, it’s often too late to implement the most powerful strategies, such as:
QSBS Optimization: Ensuring your 83(b) filing date starts the 5-year clock for Section 1202.
State Residency Planning: If you’re in a high-tax state like California or New York, moving before a liquidity event can save millions.
Trust & Estate Gifting: Moving shares into trusts while the valuation is still low.
The Rally Solution: Automate Your Equity Intelligence
You started a company to build the future, not to become a tax accountant. But in the world of venture-backed startups, a single administrative error—like a forgotten 83(b) or a misunderstood vesting schedule—can wipe out years of hard work.
Rally is the first equity tax platform built specifically for the tech ecosystem. Instead of wrestling with complex spreadsheets or paying $800/hour for a tax attorney, Rally provides a streamlined path to total tax clarity:
Upload & Analyze: Securely upload your grant agreements and 83(b) receipts. Our platform instantly parses your data to build a Free Personalized Tax Plan tailored to your specific equity structure.
Expert Execution: Once you have your plan, schedule a free consultation with a CPA through our platform to discuss advanced planning and ensure your execution is airtight.
Document Vault: Keep your 83(b) election receipts and agreements in one place, ready for the due diligence of a Series A or an exit.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
Frequently Asked Questions:
1. I missed my 30-day window. What should I do?
Immediately consult with a tax attorney. While you cannot "backdate" an 83(b), there are some high-level strategies, such as "rescinding" the stock grant and re-issuing it, but this carries significant legal and tax risks and must be done before the stock has appreciated significantly.
2. Does an 83(b) election apply to ISOs or NSOs?
Generally, no. 83(b) elections apply to Restricted Stock (common in early-founder grants). Stock Options (ISOs/NSOs) have a different tax structure, though you can file an 83(b) if you "early exercise" your options.
3. Do I need to file it with my tax return?
A: As of 2016, you no longer need to attach a copy of the 83(b) election to your annual tax return, but you must keep the original and proof of mailing in your permanent records. You will also need to provide it to future investors during due diligence.
