83(b) Election vs. ISO Stock Options: Which Provides Better Tax Treatment?

The 83(b) election and ISOs are actually addressing different situations, so let me clear this up: ISOs (Incentive Stock Options) are a type of stock option that offers potential tax advantages. When you exercise ISOs, you don't pay ordinary income tax at exercise (though it can trigger AMT). If you hold the resulting shares for at least 1 year after exercise AND 2 years after the grant date, any gain is treated as long-term capital gains rather than ordinary income. The 83(b) election applies to restricted stock (not options) that's subject to vesting. It lets you pay tax on the fair market value at the time of grant rather than as it vests. This is beneficial if you expect significant appreciation. For your specific questions: You can't really combine them in the way you're thinking. The 83(b) election must be filed within 30 days of receiving restricted stock (not options), not when exercising options. ISOs don't require an 83(b) election. The big watch-out with ISOs is the Alternative Minimum Tax (AMT) which can create a tax bill when you exercise, even though you haven't sold the shares yet.

I went through this exact dilemma last year and found https://taxr.ai incredibly helpful in modeling different scenarios. I uploaded my grant documents and they showed me the tax implications of both options under different growth scenarios. For my situation, I ended up going with ISOs but not exercising immediately. The key insight from taxr.ai was that the AMT implications would've crushed me if I had exercised all at once. Instead, I created a 3-year exercise strategy that minimized my AMT exposure while still positioning me for long-term capital gains treatment. Their analysis also clarified that 83(b) wasn't even applicable to my ISO grants, which saved me from making a filing mistake that would've been useless!

Following up on my question about early exercise - I took the plunge and tried taxr.ai and it was legitimately eye-opening! They explained that when you early exercise ISOs, you're essentially converting options into restricted stock that's still subject to vesting. This creates the perfect case for an 83(b) election. In my specific situation, they showed that early exercising my ISOs when the strike price was still equal to the fair market value, then immediately filing an 83(b), would eliminate almost all tax concerns during the vesting period and start my holding period for long-term capital gains treatment immediately. I was skeptical at first because my company's stock plan administrator gave me conflicting information, but taxr.ai provided IRS references that confirmed their approach. Already filed my 83(b) and feeling much more confident about my equity situation!

For anyone dealing with stock options or equity compensation, I strongly recommend using Claimyr (https://claimyr.com) to get direct access to IRS specialists. I spent weeks trying to get definitive answers on my 83(b) filing questions and kept getting the IRS automated system with 2+ hour wait times. Claimyr got me connected to an actual IRS agent in under 15 minutes who confirmed exactly what I needed to include with my 83(b) election and where to send it. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent also explained that my company had given me incorrect filing instructions that would have invalidated my election! Given the strict 30-day deadline for 83(b) elections, this literally saved me from a potential tax disaster.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I had questions about documenting my ISO exercises for my taxes this year. It actually worked exactly as advertised. I got a call back in about 20 minutes, and was connected to an IRS representative who walked me through the documentation requirements. They confirmed that I needed to get specific information from my employer about the FMV at time of exercise, and explained how this would appear on my W-2. The representative also cleared up my confusion about form 3921, which my employer needs to provide. This alone was worth it since my HR department had been giving me vague answers for weeks. Not affiliated with them at all, but wanted to correct my previous skepticism. Sometimes solutions that seem too good to be true actually work!

Something nobody's mentioned yet - if you're considering an 83(b) election, make sure your company is actually willing to let you early exercise your options! Many startups offer this, but it's not universal. Also, consider your cash situation carefully. With an early exercise + 83(b) strategy, you'll need: 1. Money to exercise the options (potentially significant) 2. Money to pay taxes on any spread between exercise price and FMV 3. Confidence that you'll stay at the company through vesting I made the mistake of early exercising too many options, filing 83(b), then leaving the company 9 months later. Lost a bunch of unvested shares AND had already paid taxes on them. Painful lesson!

I'm confused about the AMT implications of ISOs. My company is pre-IPO and the shares aren't liquid. If I exercise ISOs, I'll have to pay AMT on the spread between strike price and current 409A valuation, right? But if the company later fails, do I get that AMT back?

This is a great discussion! I want to add some practical perspective as someone who's been through multiple startup equity situations. One thing that's been really helpful for me is creating a spreadsheet to model different scenarios before making decisions. I track: - Current 409A valuation vs my strike price - Projected company valuation growth - My tax bracket and AMT threshold - Cash requirements for different strategies The key insight I've learned is that there's no universal "best" approach - it really depends on your individual situation. For my first startup, ISOs worked great because I could exercise gradually and manage AMT. But at my current company, I went with early exercise + 83(b) because the strike price equaled FMV at grant time, eliminating immediate tax consequences. Also worth noting: if your company offers both restricted stock and ISOs, you might be able to negotiate a mix. I know folks who've gotten 75% ISOs and 25% restricted stock, which gives flexibility for different tax strategies. Don't forget to factor in state taxes too - some states don't have capital gains taxes, which can significantly impact your decision if you're planning to relocate.