TL;DR: Filing an 83(b) election is a crucial step for almost all founders after they incorporate their business. It allows you to get taxed at the initial value of your shares, which is likely almost zero, as opposed to later, when your shares are worth much more. This can save millions in the long run if you have a successful startup outcome.

An 83(b) election is a short document that you send to the IRS that notifies them that you’d like your equity shares to be taxed at the time of grant, as opposed to when it vests. As a founder, this means that you can get taxed when your equity is worth almost nothing, rather than when it’s likely worth much more down the road. After filing an 83(b), anything else you make is treated as capital gains, not ordinary income. Long-term capital gains tax maxes out at 20%, while ordinary income gets up to 37%. On a large scale, this can result in huge differences in tax amounts.

If you believe your company’s stock will appreciate in the future, paying taxes at the initial value can result in significant tax savings. Even on the small scale, an 83(b) can end up saving you thousands of dollars. On the larger scale, it can save up to hundreds of thousands, if not millions, of dollars.

Let's say after four years of running your business, you sell your shares, making $5,000,000. If you didn't file an 83(b), you'd be taxed at the 37% federal income rate, as well as the 2.35% Medicare tax. This means you'd owe $1,967,500 in taxes. If you did file an 83(b) when you started the company, your shares were likely worth almost nothing at the time, so you paid an insignificant amount in taxes. Four years later when you sell your shares for a profit of $5,000,000, you'll only be taxed at the capital gains rate, so you'd owe $1,000,000. This means on a $5,000,000 sale, you save $967,500 in taxes by filing an 83(b)!

The timing for an 83(b) is the most critical part. You MUST file it within 30 days of receiving your shares, which, as a founder, is typically right after you incorporate. If you miss the 30-day window by even a day, you lose the election permanently.

Filing an 83(b) election can save you a shocking amount of money down the road, so it’s worth the minor inconvenience today. Most importantly, remember that you have only 30 DAYS to file it. This means that essentially right after you incorporate and give yourself shares or options, filing an 83(b) should be a top priority.