Similar to taxation on any other income, the IRS requires individuals to pay taxes on equity compensation. An 83(b) election is an option implemented by the IRS that allows stock holders to decide (at the start of a vesting period) to pay income taxes on the present value of the equity for the entire amount that will vest.

The 83(b) election is valuable if you believe that the value of the company (and subsequently the equity) will continue to rise as you’re pre-paying your tax liability on a lower valuation and then paying long-term capital gains on the increase. If the company’s value decreases, however, you’ve prepaid at a higher valuation and overpaid taxes.

This is for information purposes only and does not constitute tax advice. Please consult a tax advisor for advice specific to your circumstances.