December 12, 2025
Equity is a probabilistic asset. When it is granted, you receive a claim that becomes concrete when certain conditions are met. The rate at which the claim converts equity to a deterministic asset that you own is called the vesting schedule. This schedule is a time-indexed curve that governs equity’s transformation from an asset that the company can take back to an asset owned entirely by you.
In the default world, every time your shares (fractional equity) vest, i.e. their status changes from “Reserved for you” to “Owned by you”, you’re acquiring ownership of new assets of economic value that you previously did not own. This is a form of income, and you’re taxed on it exactly like ordinary income. This tax applies to you at the moment of vesting, regardless of whether you choose to sell your shares or not.
Each vesting event creates taxable income that is equal to the Fair market value (FMV) of the shares (fractional equity) that vested. If the FMV of shares is higher than it was when you purchased them, you pay income tax on that spread. In startups, since equity is usually purchased at a nominal value, n, the FMV(purchase) is ~0. So, the income is FMV(vest) - FMV(purchase) = FMV(vest).
Since the tax on this vested equity arrives before the liquidity of the equity, you owe significant money on an asset you probably can’t yet sell. If the company’s valuation grows, each vesting event triggers a larger tax bill on an illiquid asset.
83(b) election is a way to mutate equity from a probabilistic asset that gives you income over the vesting schedule to an asset you outright own today.
By filing an 83(b) election, you inform the IRS of this conversion, and recognize the entire grant as income today. You pay tax on the FMV of the entire equity today, and any future appreciation is just the appreciation of an asset, not new income. Since the FMV is usually very low at the time of filing the 83(b) as you can only file 83(b) within 30 days of getting the grant, this is a neat way to convert all future appreciation into capital gains that are taxed only when you sell.
P.S. Here I treat equity as RSAs, but there are differences if it’s options or RSUs.