83(b) Election Tax Savings: A Worked Example Showing $1M+ in Savings

This is a hypothetical, with round numbers chosen to make the arithmetic easy to follow. A founder buys 2,000,000 shares of restricted common stock at $0.001 per share, paying $2,000. The shares vest over four years with a one-year cliff. At purchase, fair market value is also $0.001 per share.

The company raises a seed round and then a Series A. When the cliff hits at month 12, the 409A value is $0.50 per share. The remaining 1,500,000 shares vest monthly over years two through four at an average value of $5.00 per share. The company is acquired for $10.00 per share about 18 months after the last tranche vests, so every share has been held more than a year.

The founder lives in California and is in the top brackets: 37% federal on ordinary income, 20% on long-term capital gains plus the 3.8% net investment income tax, and 13.3% California on both. We ignore QSBS for now and come back to it at the end.

Without the election, IRC §83(a) taxes each tranche as ordinary income when it vests, on its value then minus the price paid.

• Cliff: 500,000 x ($0.50 minus $0.001) = $249,500.
• Years two to four: 1,500,000 x ($5.00 minus $0.001) = $7,498,500.
• Total ordinary income: $7,748,000.

At a combined 50.3% (37% federal plus 13.3% California), that is about $3,897,000 of tax, owed year by year while the shares are still illiquid. Because the founder is usually an employee, the company also has to withhold, and payroll taxes apply on top, which this example leaves out.

At the sale, basis is the $2,000 paid plus the $7,748,000 already taxed, so the capital gain is $20,000,000 minus $7,750,000, or $12,250,000. At 37.1% (23.8% federal plus 13.3% California), that is about $4,545,000.

Total tax in Scenario A: about $8,442,000.

The founder files the 83(b) election within 30 days of buying the shares. Income at the election is 2,000,000 x ($0.001 minus $0.001) = $0, so the election costs nothing in tax.

Nothing happens at the vesting dates. At the sale, the gain is 2,000,000 x ($10.00 minus $0.001) = $19,998,000, all long-term because the holding period started on the purchase date. At 37.1%, the tax is about $7,419,000.

Total tax in Scenario B: about $7,419,000.

The election saves about $1,023,000. The saving equals the $7,748,000 of vesting income multiplied by the 13.2-point gap between the 50.3% ordinary rate and the 37.1% capital gains rate. The bigger practical difference is timing: in Scenario A the founder needs almost $3.9 million of cash for taxes before the company is sold, which many founders simply do not have.

QSBS widens the gap. With an 83(b), the QSBS holding period for all 2,000,000 shares starts at purchase. Without it, each tranche's holding period starts when it vests, so later tranches may not reach the three- or five-year marks by the exit. For stock issued after July 4, 2025, held five years, up to $15 million of gain can be federally excluded under §1202 (California does not follow that exclusion).

The saving scales directly with the value of the shares when they vest, because it equals the vesting income multiplied by the gap between ordinary and capital gain rates. Change one input at a time and the pattern is easy to see.

• Lower Series A value. If the shares vest at an average of $2.00 instead of $5.00, vesting income in Scenario A falls to $249,500 + 1,500,000 x $1.999 = $3,248,000. The saving falls to about $428,700 (13.2% of $3,248,000).
• Founder in Texas instead of California. With no state income tax, the rate gap is 37% minus 23.8%, still 13.2 points, so the saving on the original facts is still about $1,023,000. The cash needed before liquidity drops to about $2,867,000 (37% of $7,748,000).
• Company never raises. If the value never moves above $0.001, there is no vesting income and the election changes nothing except the start of the holding period.

The pre-exit tax bill is the number founders should focus on. A seven-figure tax bill on illiquid stock is what forces secondary sales or loans.

If the shares are qualified small business stock issued after July 4, 2025 and held at least five years, IRC §1202 can exclude 100% of the gain up to the greater of $15 million or 10 times basis, and the 83(b) is what starts that five-year clock on the purchase date.

Applied to Scenario B (hypothetical, and assuming the company meets the $75 million gross-asset and active-business tests): the founder's gain is $19,998,000 after about five and a half years. The first $15,000,000 is excluded from federal tax, including the 3.8% net investment income tax. The remaining $4,998,000 is taxed at 23.8%, about $1,189,500. California does not follow §1202 and taxes the full gain at 13.3%, about $2,659,700. Total tax is roughly $3,849,000, compared with $7,419,000 without QSBS.

Without the 83(b), each tranche's QSBS holding period and basis start when it vests, so in this example every share vesting after month 30 is held less than three years at the month-66 exit and gets no exclusion. In this example, the 83(b) election is worth far more for its effect on QSBS than for the rate gap alone.

An 83(b) election can lose money when you pay tax up front on stock you later forfeit. If the shares are worth more than you pay at the time of the election, you report the difference as ordinary income immediately. Should you leave before vesting, Treas. Reg. §1.83-2(a) limits your loss to what you paid minus what you get back, and the income you reported is not deductible.

For founders buying at fair market value on the day of incorporation, that risk is close to zero, because the reported income is zero. It grows for later hires receiving restricted stock after a priced round, where the spread can be large. In those cases, compare the tax due today with the likely value at vesting and your chance of staying through the schedule.

The 83(b) election must be filed within 30 days of the stock transfer under IRC §83(b)(2). There are no extensions. If day 30 falls on a weekend or legal holiday, the next business day counts, but day 31 on a normal week is too late and Scenario A applies by default.

Filing is simple. You can submit IRS Form 15620 online through the IRS website after an ID.me sign-in, or mail a signed election to the IRS service center for your state by certified mail. Give the company a copy. You no longer attach a copy to your Form 1040.

We prepare the election alongside the stock purchase agreement so it is signed at the same time. The numbers in this example are hypothetical, and this is general information, not tax advice for your specific facts.