About To Owe A Fortune In Taxes? The 83(b) Election Could Save You

True Root Financial is a fee-only financial advisor and financial planner based in San Francisco, CA. We serve clients across the globe.

Whether you’ve joined a high-growth startup or received restricted stock from a pre-IPO company, your equity’s future potential can be life-changing. But there’s a catch: as your company’s value grows, so can your tax bill.

That’s where the 83(b) election comes in, a little-known IRS filing that could save you thousands in taxes if used strategically.

If you are a tech professional interested in learning how we can help you claim your financial independence by investing wisely, minimizing taxes, and maximizing your equity compensation, please book a no-obligation call here.

What Is 83(b) Election?

The 83(b) election is a provision in the U.S. tax code that allows you to pay income tax upfront on restricted stock at its current, often low, fair market value.

Without this election, you pay taxes later, as your shares vest, when the stock’s value may be significantly higher. By filing the 83(b), you shift taxation from a potentially large future event to a smaller one today, turning future gains into capital gains instead of ordinary income.

Why It Matters For Tech Executives?

Let’s say you join a promising San Francisco startup and receive 10,000 restricted shares valued at $1 per share.

Without the 83(b) election: You’ll pay ordinary income tax as your shares vest. If your company’s value hits $10 per share, you’ll owe tax on $90,000 of income, at one of the highest tax rates in the country.

With the 83(b) election: You pay tax upfront on the $10,000 current value. The remaining appreciation is taxed later as capital gains, often at nearly half the rate.

For tech executives subject to California’s steep tax rates, that difference can easily reach tens of thousands of dollars.

How The 83(b) Election Works?

The process is straightforward, but timing is everything.

• Receive your restricted stock grant.
• File IRS Form 83(b) within 30 days of the grant date.
• Mail the form to the IRS (no e-filing allowed) and send a copy to your employer.

If you miss that 30-day deadline, you lose the opportunity permanently, no extensions, no do-overs.

When Does The 83(b) Election Make Sense?

The 83(b) election is particularly effective when:

• Your company’s current valuation is low and expected to rise.
• You’re committed to staying through the vesting period.
• You can afford the upfront tax payment comfortably.

However, if the company’s future is uncertain, its valuation is already high, or liquidity could take years, the election might not be worth the risk.

The Benefits: Locking In A Low Tax Value

The primary advantage of the 83(b) election is tax efficiency. Filing early allows you to:

• Pay taxes at a lower valuation. You’re taxed on today’s small number, not tomorrow’s big one.
• Convert future appreciation to capital gains. Capital gains rates are lower than ordinary income rates.
• Start the capital gains holding period early. This means you could qualify for long-term capital gains treatment sooner, which often translates to lower taxes upon sale.

When May 83(b) Not Be Right? What Could Go Wrong?

While the 83(b) election can be powerful, it’s not without risk.

• If you leave before vesting, you could lose unvested shares but still owe taxes on their original value.
• If the stock value declines, you can’t get a refund on taxes you’ve already paid.
• You must pay upfront. The election requires you to pay ordinary income tax immediately, even though your shares aren’t yet liquid.

In short: you’re betting on your company’s success. If things go well, the payoff can be substantial. If not, you might prepay taxes on equity that never materializes.

Real-World Example: The Tax Savings In Action

Let’s compare two executives: Jordan and Alex, who both receive 10,000 restricted shares at $1 per share.

• Jordan (no 83(b)): When the stock reaches $10 at vesting, Jordan pays ordinary income tax on $90,000.
• Alex (files 83(b)): Alex pays ordinary tax upfront on $10,000, and the $90,000 gain is taxed later at capital gains rates.

If both sell at $10/share, Alex’s total tax bill could be $15,000–$20,000 lower, a clear example of how timing transforms tax outcomes.

This is a common scenario in Silicon Valley, where equity is abundant, valuations rise quickly, and tax exposure grows just as fast.

Why A Financial Advisor Should Be In The Loop?

Because the 83(b) election is time-sensitive and irreversible, it’s crucial to get it right the first time. A qualified financial advisor or tax planner can:

• Evaluate your company’s growth potential.
• Model tax outcomes under different scenarios.
• Ensure the election aligns with your long-term goals and cash flow.
• For tech executives juggling RSUs, ISOs, and restricted stock, integrating the 83(b) election into your broader financial plan can help maximize returns and minimize taxes.

Your Next Steps:

If you’re a tech executive facing a potential big tax bill on your equity, explore whether filing an 83(b) election makes sense for your situation. A conversation with your financial advisor today could translate into substantial savings tomorrow. Book a call below:

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