83(b) Election Tax Savings: A Worked Example Showing $1M+ in Savings
Rohan Miller
Head of Tax Strategy
The 83(b) election is one of the few tax moves that can save a founder seven figures with a single page of paperwork. Here are the actual numbers.
Setting Up the Scenario
Alex co-founds a startup in January 2025 and purchases 2,000,000 shares of restricted common stock at $0.001 per share, paying $2,000 total. The stock is subject to a standard 4-year vesting schedule with a 1-year cliff. At the time of purchase, the 409A fair market value is $0.001 per share. The company raises a Series A in month 8, and the 409A valuation increases to $0.50 per share. By month 18, after strong growth, the 409A is $2.00 per share. The company is eventually acquired in year 4 for $10.00 per share. Alex is a California resident in the top federal and state brackets.
Scenario A: No 83(b) Election Filed
Without an 83(b) election, Alex recognizes ordinary income as each tranche vests. At the 1-year cliff (500,000 shares vesting, FMV $2.00), ordinary income is 500,000 x ($2.00 - $0.001) = $999,500. Monthly vesting for years 2 through 4 creates additional ordinary income at progressively higher valuations. Assume an average FMV of $5.00 for the remaining tranches. That is 1,500,000 shares x ($5.00 - $0.001) = $7,498,500 in ordinary income. Total ordinary income: approximately $8,498,000. At a combined federal and California rate of roughly 50.3% (37% federal + 13.3% state), the ordinary income tax is approximately $4,274,000. At sale, the gain above the vesting-date FMV is taxed as capital gains, but the damage is already done on the ordinary income portion.
Scenario B: 83(b) Election Filed Within 30 Days
Alex files the 83(b) election in January 2025, within 30 days of receiving the stock. The ordinary income recognized is 2,000,000 x ($0.001 - $0.001) = $0. Alex paid fair market value, so there is zero taxable income at the time of the election. When the company is acquired at $10.00 per share, Alex sells all 2,000,000 shares. The capital gain is 2,000,000 x ($10.00 - $0.001) = $19,998,000. Since Alex held the shares for more than one year, this is long-term capital gains. At 23.8% federal (20% + 3.8% NIIT) plus 13.3% California, the total tax rate is approximately 37.1%. Total tax: approximately $7,419,000.
Comparing the Two Outcomes
In Scenario A, the total tax bill is approximately $4,274,000 in ordinary income tax on vesting, plus capital gains tax on the remaining appreciation at sale. The blended effective rate is significantly higher because a large portion of the gain is taxed as ordinary income. In Scenario B, all appreciation is taxed at long-term capital gains rates. The tax savings from filing the 83(b) election exceed $1,200,000 in this example. The savings come from two sources: the rate differential between ordinary income and long-term capital gains, and the fact that the income is recognized when the stock is worth essentially nothing rather than after it has appreciated.
Why Speed Matters
The 83(b) election must be filed within 30 days of receiving the stock. There are no extensions and no exceptions. If Alex waits until day 31, the election is invalid, and Scenario A applies by default. The $2,000 purchase price and the $0 tax at the time of the election are the entire cost of preserving over $1,000,000 in tax savings. We prepare and file 83(b) elections within 48 hours of receiving the stock purchase agreement. The form itself is one page. The savings justify treating the deadline with the same urgency as a fundraise closing.
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