83(b) Election & Early Exercise: Complete Guide for Startup Employees [2025]

There can be significant tax benefits to exercising stock options early, before they vest. This strategy may increase your potential gains by minimizing your overall taxes, as well as decrease the upfront costs when you exercise. By properly filing an 83(b) election with the IRS within 30 days of early exercising your options, you can accelerate your long‑term capital gains holding period while avoiding ordinary income taxation upon vesting.

While this is one strategy to consider, if you have stock options and want to get the full picture of how they work, read our Stock Option Starter Guide.

What is an early exercise?

Early exercising is when you exercise your stock options before they vest.

Early exercising is not always feasible, as companies have to specifically allow it. Ask your employer or check your option grant if you're not sure whether this is the case for you.

Why would I early exercise my stock options?

Exercising early may help:

• Lower your upfront tax bill
• Start the clock toward long-term capital gains treatment sooner
• Reduce your total tax liability if your company grows in value

When your company is still early-stage, the difference between your strike price and fair market value (FMV) may be minimal, meaning little or no tax is due at exercise. That makes it less expensive to exercise and helps limit your risk if the company doesn't succeed or have a successful exit.

What are the benefits of exercising early?

Not all companies allow employees to exercise their options early. However, if your employer does, there can be significant potential tax savings to going this route, especially if your strike price and the company's fair market value (FMV) valuation are still relatively close.

If your company allows it, early exercise may provide:

• Lower or no taxes due at the time of exercise (if FMV is close to your strike price)
• Earlier start to the capital gains holding period
• Greater potential after-tax gains if your company grows in value

For NSOs, long-term capital gains treatment applies if you hold the shares for at least one year after exercising.

If you early exercise ISOs (i.e., before they vest), they may no longer qualify for ISO treatment and instead be taxed like NSOs. However, by filing an 83(b) election, you can still lock in the current fair market value and start the clock toward long-term capital gains. This can provide similar tax benefits, especially if your company's value increases significantly over time.

What are the drawbacks of early exercise?

There are risks to consider:

• If the company's value declines, you might not recover your investment
• If you leave before your shares vest, the company can typically repurchase the unvested shares at the strike price (a "clawback")
• You may still owe taxes up front, depending on the FMV at exercise
• Cash flow impact: You'll need funds for both exercise costs and immediate tax obligations
• Opportunity cost: Money tied up in company stock can't be diversified into other investments

How do I file an 83(b) election?

To file properly:

Option 1: New IRS Form 15620 (recommended for 2025) The IRS introduced Form 15620 in 2024, providing a standardized form for 83(b) elections. This reduces filing errors and is now the preferred method.

Option 2: Written statement (traditional method) Download and complete the 83(b) election form and cover letter. Your company may provide templates, or platforms like Carta or Shareworks can generate them.

Filing requirements:

• Sign three copies of the election form
• Mail one copy, with the cover letter, to the IRS within 30 days of your early exercise. Use certified mail with return receipt
• Give one copy to your company
• Keep the final signed copy, along with your proof of mailing, for your records

Critical deadline: This must be completed within 30 days of your early exercise. No exceptions. A late filing can eliminate the tax benefits and expose you to a larger tax bill in the future.

What does the 83(b) election mean technically?

The name refers to a provision under section 83(b) of the U.S. tax code that allows you to elect being taxed on your equity compensation today versus when it vests.

By filing an 83(b) election, you can pay tax on the 409A valuation (also known as fair market value) of company shares today versus their 409A valuation in the future, which may be higher. The 409A valuation is reevaluated regularly and grows as your company becomes more successful.

Tax treatment comparison:

Without 83(b) election:

• No tax at exercise
• Taxed as ordinary income when shares vest (based on FMV at vesting)
• Capital gains holding period starts at vesting

With 83(b) election:

• Taxed as ordinary income at exercise (based on FMV at exercise)
• No additional tax when shares vest
• Capital gains holding period starts at exercise

This timing difference can result in significant potential tax savings if your company appreciates in value, as more of your gains will be federally taxed at capital gains rates (typically 15-20%) rather than ordinary income rates (up to 37%).

Additional considerations for 83(b) elections

State tax implications

State tax treatment varies significantly. California, for example, may still tax gains on shares acquired while a California resident, even after you move. Conversely, states with no income tax (like Florida or Texas) won't impose state taxes on your 83(b) election.

AMT considerations for ISOs

If you're early exercising ISOs with an 83(b) election, consider potential Alternative Minimum Tax (AMT) implications, especially if the spread between strike price and FMV is substantial.

Company stage timing

83(b) elections tend to work best at earlier-stage companies where the gap between strike price and fair market value is smaller. Later-stage companies with higher valuations mean larger immediate tax bills.

Is early exercising beneficial for me?

The decision depends on several factors:

• Company stage and growth prospects: Earlier-stage companies with strong potential typically offer better 83(b) opportunities
• Strike price vs FMV gap: Smaller spreads mean lower immediate tax costs
• Personal financial situation: Can you afford exercise costs plus taxes?
• Employment stability: Risk of forfeiture if you leave before vesting
• Risk tolerance: Comfort level with potentially losing your investment

Get personalized analysis: Secfi has tools to help you determine the optimal approach for your situation:

Use Secfi's Equity Planner to model 83(b) tax implications with your actual numbers and different exit scenarios.

Try Secfi's Exercise Timing Planner to determine when to exercise considering 83(b) elections, cash flow, and company milestones.

These tools can help you compute the difference in potential gains between exercising today versus waiting for your company to exit, and calculate how much you would owe in taxes if you exercised now—and how that amount could change over time.

Need personalized guidance? Complex equity situations benefit from professional insight. Secfi's advisors work exclusively with startup employees and can help you evaluate whether an 83(b) election fits your broader equity strategy. Learn more about Secfi Wealth