By Harry Prabandham · Updated September 27, 2026
Equity Compensation
Early Exercise and the 83(b) Election, Explained
Early exercise lets you buy unvested option shares now. An 83(b) election, due within 30 days, taxes them at today's value instead of at each vest.
Early Exercise and the 83(b) Election, Explained
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What are early exercise and the 83(b) election?
- Some startup plans let you exercise options before they vest; the shares stay subject to vesting and a company repurchase right.
- Without an election, restricted shares are taxed as they vest, based on their value at each vesting date.
- An 83(b) election tells the IRS to measure the taxable amount at purchase instead, when the spread is often zero or small.
- The deadline is 30 days after the shares are transferred to you, which for early exercise is the exercise date.
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What are early exercise and the 83(b) election?
- Some startup plans let you exercise options before they vest; the shares stay subject to vesting and a company repurchase right.
- Without an election, restricted shares are taxed as they vest, based on their value at each vesting date.
- An 83(b) election tells the IRS to measure the taxable amount at purchase instead, when the spread is often zero or small.
- The deadline is 30 days after the shares are transferred to you, which for early exercise is the exercise date.
How does the tax math change?
- For NSOs, paying the full 409A value means the election reports little or no income, and later growth can become capital gain.
- For ISOs, the election applies for alternative minimum tax purposes, which can avoid an AMT spread building up as shares vest.
- The holding period starts at exercise; ISO shares still need two years from grant and one from exercise for full long-term treatment.
- Exercising also starts the QSBS holding period, which cannot begin while you hold only options.
The risks
- You pay the strike price, and any tax, in cash for shares that may never be sellable or may become worthless.
- If you leave before vesting, the company usually repurchases unvested shares, often at your cost; your plan documents control.
- If shares are forfeited or lose value, tax already paid because of the election generally is not refunded.
- Cash tied up in illiquid employer stock adds to the concentration you already have through your job.
How is an 83(b) election filed?
- Since July 2025, the IRS accepts Form 15620 online through an IRS account, with immediate confirmation of receipt.
- Paper filing still works: mail the form or a compliant statement to the IRS office where you file, using tracked certified mail.
- Give a copy to the company and keep proof of timely filing with your permanent records.
- Attaching a copy to your tax return has not been required since 2016, though your preparer may want one.
What if the 30-day deadline is missed?
- The deadline is set by statute, and the IRS does not grant extensions for late elections.
- Without an election, each vesting tranche is taxed as it vests, which can mean income tax or AMT on gains you can't sell.
- An election generally cannot be revoked without IRS consent, which is limited to narrow cases such as a mistake of fact.
- A tax professional can review how remaining tranches or future grants might be handled differently.
When early exercise tends to make sense
- When the exercise cost is small and the spread is near zero, as is common at very early-stage companies.
- When you expect to stay through vesting and could afford to lose the entire amount paid.
- Less often when the 409A value is high, because cash at risk and potential AMT rise quickly.
Key takeaways
- Early exercise trades cash and risk today for potentially lower taxes and earlier holding periods later.
- The 83(b) deadline is 30 days from exercise with no extensions; online filing makes proof easier.
- Only money you could lose entirely belongs in an early exercise.
- Confirm the decision with a CPA or tax attorney; Rubric does not prepare tax returns.
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