83b Election

In essence, the 83(b) election is a pre-payment of your taxes on the shares that have a low valuation, assuming that the value of the equity would increase in the years that follow.

Under the IRC (Internal Revenue Code), the 83(b) election is a provision that provides a startup founder or an employee the option to pay their taxes on the total FMV (fair market value) of the restricted stock at the time they are granted.

This is only applied to the equity subject to vesting. By choosing this, the IRS would know to tax the person for the ownership of the shares at the time they are granted, instead of when they are vested.

In essence, the 83(b) election is a pre-payment of your taxes on the shares that have a low valuation, assuming that the value of the equity would increase in the years that follow. Nonetheless, in case the value of the shares drop, then this tax strategy may create a loss for you, as you would have overpaid on taxes for shares of a much higher valuation.

Normally as soon as an employee or the founder gets the equity compensation in the company, the shares are subjected to income tax on its value, determined at the time they are granted in that particular year. There are also situations where people get the equity vesting over many years.

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