Step-by-step · 3 min read
Early exercise and the 83(b) election
If your company lets you exercise options before they vest, or grants you restricted stock that vests over time, an 83(b) election lets you choose to be taxed now, on today's value, instead of as each share vests at what you hope will be a much higher value.
It also starts your capital gains clock and, for qualified small business stock, your QSBS clock. The catch is a strict 30-day deadline and the risk of paying tax on shares you might later lose.
- Who it fits
- Startup employees and founders with unvested stock or early-exercisable options.
- Usually not a fit
- Public-company employees with RSUs. An 83(b) election does not apply to RSUs.
- Figures
- 2026 tax year
The key rule
The 83(b) election must be filed with the IRS within 30 days of the grant or early exercise. There are no extensions and no exceptions.
How it works
Without an election, restricted stock is taxed as it vests: the value at each vest date, minus what you paid, is ordinary income. If the company grows, that can be a large amount of income on shares you still cannot sell.
With an 83(b) election, you are taxed once, at the time you receive the shares, on their value then minus what you paid. If you paid full fair market value (common with early exercise at the 409A price), the taxable amount is zero. All later growth is capital gain, and the holding period starts now.
5 steps
Confirm you are eligible
Check your grant agreement for early exercise or restricted stock subject to vesting. Get the current 409A fair market value from your company.
Run the numbers
If you are buying at fair market value, the election costs nothing in tax. If there is a spread, you owe tax on it now. We compare that with the likely tax as shares vest, and with the risk of losing what you paid.
Prepare the election
The election must include your name, address and taxpayer ID, a description of the property, the date of transfer, the tax year, the vesting restrictions, the fair market value, what you paid and the amount to include in income. The IRS Form 15620 covers all of these, and many companies give you a template.
File it within 30 days
Mail it to the IRS office where you file your return, by certified mail with return receipt. Day 1 is the day after the grant or exercise. Do not wait until day 29.
Copy your company and keep proof
Give a copy to your employer. Keep a copy and the mailing receipt with your permanent records. You do not need to attach it to your tax return.
Example
Early exercise at the 409A price
You early-exercise 40,000 options at $0.50, the current 409A value, paying $20,000. You file an 83(b) showing $0 of income. Four years later the shares are worth $10 each and fully vested. Without the election, you would have had about $380,000 of ordinary income as they vested. With it, you have none, and a sale after a year is long-term capital gain.
Common mistakes
- Missing the 30 days. There is no fix.
- Forgetting that if you leave before vesting and the company buys back unvested shares at cost, any tax you paid is not refunded.
- Assuming an 83(b) helps when there is a large spread. You could pay a lot of tax on shares that never vest or never become valuable.
Key dates
- Grant or exercise date
- The 30-day clock starts the next day.
- Day 30
- Postmark deadline for the election.
Questions we hear
Can I file the election electronically?
The IRS has been adding online options. Certified mail with return receipt remains the most reliable proof of timely filing.
What to send us
- Grant or exercise agreement
- Current 409A value
- A copy of the filed election and mailing receipt
Upload them to your client portal.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.