83(b) election

An 83(b) election is a letter sent to the IRS by a startup founder or employee to change how their restricted stock is taxed. By default, the IRS taxes equity as it vests based on its "Fair Market Value" at each vesting date; however, an 83(b) election allows the holder to be taxed on the entire grant's value on the day it is received instead. For founders, this is highly advantageous because the stock's value at the start is usually nominal (pennies per share), meaning they pay little to no tax upfront. By "freezing" the tax valuation early, they avoid potentially massive ordinary income tax bills later if the company's valuation skyrockets during the vesting period, and they also start the one-year clock for lower long-term capital gains tax rates immediately.