Picture this: you just received your first batch of startup shares as a founder. It’s exciting but also nerve-wracking. How do you handle the tax implications?

Enter the 83(b) election: a simple but powerful IRS filing that can save founders thousands in future taxes if used correctly. Startups often grant equity that vests over time, which can create massive tax bills on shares you don’t even fully own yet.

For founders in California and Nevada, understanding how the 83(b) election works is especially important. These two states have very different tax systems, California’s high income tax versus Nevada’s zero state tax making your filing decision potentially life-changing.

In this guide, we’ll break down what the 83(b) election is, why timing matters, and how founders can use it to minimize tax risks and maximize startup gains.

What Is an 83(b) Election?

An 83(b) election is a provision in the U.S. tax code that lets an employee or startup founder who receives restricted stock choose to pay taxes on the fair market value (FMV) of the stock when it’s granted, instead of when it vests. To make the election, you must file IRS Form 83(b) within 30 days of receiving the shares no exceptions or extensions.

Why does this matter? Normally, you’d owe ordinary income tax each time your stock vests, and if the company’s value rises, you pay tax on a much higher amount. With an 83(b) election, you lock in your tax basis early, often at a minimal valuation, reducing future tax exposure.

The downside: if your shares never vest or lose value, you’ve already paid tax on income that effectively disappears. It’s a calculated risk, but one that can yield major savings if your startup succeeds.

Why 83(b) Elections Matter for Startup Founders

For startup founders, equity compensation is often the most valuable part of their income. The timing and amount of tax owed on this equity can dramatically affect long-term finances and liquidity. Without an 83(b) election, founders may face large income tax bills on shares that have vested but haven’t been sold, a situation that often leads to painful cash flow problems.

Filing the 83(b) election early means paying taxes when the stock’s fair market value is still very low, potentially saving thousands of dollars later. It also starts the capital gains clock, which allows future profits to qualify for lower capital gains tax rates instead of ordinary income rates.

Conversely, skipping or delaying the election can result in taxation at much higher valuations, especially if the company’s value increases rapidly. For most founders, the 83(b) decision is one of the first and most strategic financial moves they’ll ever make, one that can significantly shape long-term wealth accumulation.

Special Considerations for California and Nevada Founders

• California

California’s state income tax can reach 13.3%, so the timing of income recognition is critical. Filing an 83(b) election lets founders report income based on the stock’s low grant value, reducing immediate state taxes.

However, the Franchise Tax Board (FTB) closely reviews equity transactions. Founders should ensure accurate valuations (409A), on-time filing, and proper documentation to avoid audit risks. California also has an Alternative Minimum Tax (AMT), which may apply to large stock grants, making early planning with a startup-focused CPA essential.

• Nevada

In contrast, Nevada has no state income tax, offering a simpler path for founders. You’ll still need to file the 83(b) election federally, but there’s no state-level tax impact.

This tax advantage can significantly boost after-tax returns as your startup grows. Still, maintain accurate IRS filings and records, and be aware that moving to a taxable state later can change your exposure.

Comparison table: Tax impact in each state

Common Mistakes and How to Avoid Them

Missing the 30-day filing deadline The IRS gives you only 30 days to file after receiving your shares, no extensions. Missing this window means losing the chance to lock in a lower tax basis and potentially paying much more later.

Not sending a copy to your company Always provide a copy of your filed 83(b) election to your startup for recordkeeping. Missing paperwork can create issues during fundraising rounds, audits, or exit events.

Valuation errors Overvaluing your stock increases your immediate tax bill, while undervaluing it may trigger an IRS audit. Work with a qualified CPA or use a 409A valuation to determine a fair market value (FMV).

Ignoring state-specific tax rules States like California have their own tax requirements that don’t always align with federal law. Failing to account for these can lead to unexpected state tax liabilities.

How 83(b) Fits into Your Long-Term Tax Strategy

Filing an 83(b) election is not just a one-time tax move; it’s part of a broader strategy to maximize wealth from startup equity. By locking in a low tax basis early, founders can benefit from lower capital gains taxes when they eventually sell their shares.

This strategy also aligns with long-term financial planning. Founders can better forecast tax liabilities, manage cash flow, and plan for liquidity events like acquisitions or IPOs. It complements other tax planning tools such as Qualified Small Business Stock (QSBS) exemptions, which can offer additional tax savings.

Moreover, understanding the timing of income recognition helps founders avoid surprises during fundraising rounds or exit transactions. It’s about controlling the tax narrative rather than reacting to it.

How Pathfinding Consultants Can Help

Tax planning around startup equity, especially with 83(b) elections, can be complex and nuanced. Pathfinding consultants specialize in guiding founders through these decisions, ensuring compliance and optimizing tax outcomes.

Working with experts reduces the risk of costly mistakes, audits, and missed opportunities. It also frees founders to focus on building their business while having confidence that their tax strategy supports their long-term goals.

Conclusion

The 83(b) election is a powerful but often overlooked tool for startup founders, especially those navigating the distinct tax landscapes of California and Nevada. Making the election can save significant money, reduce tax complexity, and set the stage for long-term financial success.

Founders should act quickly, understand state-specific rules, and seek expert guidance to avoid common pitfalls. Whether you’re in California facing high state taxes or in Nevada enjoying tax advantages, the 83(b) election can be a cornerstone of your startup’s tax strategy.