83(b) Elections for Token Vesting: A Tax Strategy Guide for Crypto Founders and Employees
Apr 15, 2025
Discover how 83(b) elections can drastically reduce your tax bill on crypto token vesting. Learn key benefits, filing tips, and how to avoid costly mistakes as a founder or early employee.
DISCLAIMER: This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. Readers should consult with qualified tax professionals, attorneys, or financial advisors before making any decisions regarding 83(b) elections or token vesting arrangements.
In the cryptocurrency and blockchain industry, token vesting has become a standard compensation method. However, the tax implications can be complex and potentially costly. The 83(b) election offers a strategic tax planning opportunity that could save founders and early employees significant amounts in tax liability.
This comprehensive guide explores everything you need to know about 83(b) elections for token vesting, written in collaboration with Mo Yang, founder and managing partner of Convoy Finance - leading crypto tax and accounting firm in the US and Canada.
What is an 83(b) Election?
An 83(b) election is a tax strategy that allows you to pay ordinary income taxes on your entire token grant upfront, based on its current value, instead of paying ordinary income taxes on each portion as it vests over time.
This provision in the U.S. tax code can be particularly beneficial if you expect the token's value to increase significantly in the future and help you take advantage of the preferred capital gains tax rate on the token’s appreciation rather than paying tax at the higher ordinary income tax rate.
The 83(b) election must be filed with the Internal Revenue Service (IRS) within 30 days of receiving the tokens.
Find the dedicated U.S. Code original text from the Cornell Law School website here, and below is the specific code section describing it:
(b) Election to include in gross income in year of transfer
Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—
(A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
(B) the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
(2) Election
An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.
Find the original 83(b) form to file here.
Example
Imagine you receive a grant of 100,000 tokens worth $0.10 each ($10,000 total) that vest over four years.
Without an 83(b) election, you would pay ordinary income taxes on 25,000 tokens each year as they vest, based on their value at that time.
Scenario 1: Without 83(b) election
Year 1: Tokens now worth $1.00 each → Tax on $25,000 of income
Year 2: Tokens now worth $5.00 each → Tax on $125,000 of income
Year 3: Tokens now worth $10.00 each → Tax on $250,000 of income
Year 4: Tokens now worth $15.00 each → Tax on $375,000 of income
Total taxable income: $775,000
For federal income tax purposes, ordinary income may be taxed at a rate of up to 37%. State income tax rates are on top of this.
Be aware that, when you sell the tokens, you also pay capital gains tax on any increase in value from the vesting date to the sale date.
For example, if tokens vest at $1.00 and you later sell at $20.00, you pay capital gains tax on the $19.00 gain per token.
Scenario 2: With 83(b) election
When you become entitled to the grant → Pay ordinary income taxes on $10,000 (the initial value)
Years 1-4: No additional ordinary income tax as tokens vest
When you sell the tokens → Pay capital gains tax on the difference between $10,000 and the sale price
The federal tax rate on long-term capital gains is either 15% or 20%, depending on your earnings, and thus significantly lower than the 37% federal tax rate on ordinary income.
This creates a far more favourable situation for individuals holding the tokens.
Key Benefits of Filing an 83(b) Election
Tax Optimization
By paying taxes upfront on the grant's initial value, individuals can potentially realize significant tax savings if the token appreciates. This is especially valuable for early-stage projects where token values are initially low but have high growth potential.
Simplified Tax Planning
The 83(b) election consolidates the tax event of the grant to a single point in time, eliminating the need to calculate and pay taxes at each vesting milestone. This simplification can be particularly valuable in volatile crypto markets where token values fluctuate dramatically.
Long-Term Capital Gains Treatment
Filing an 83(b) election starts the capital gains holding period immediately, rather than at each token grant vesting date. This means tokens held for more than a year after the grant date may qualify for preferential long-term capital gains tax rates when sold, potentially reducing the tax rate from ordinary income rates (up to 37%) to long-term capital gains rates (0%, 15%, or 20%).
Filing Process and Timing
Step | Description |
|---|---|
1. Create election document | Include taxpayer information, details about tokens, fair market value, and amount paid |
2. Mail to IRS | Send via certified mail with return receipt to appropriate IRS Service Center |
3. Submit copy to employer | Provide a copy to the organization issuing the grant |
4. Retain proof | Keep a photocopy of the election and proof of mailing. Additionally, if you want confirmation that your 83(b) election was received, you can mail it via certified mail with a return receipt requested. This way, you'll have proof of delivery. |
5. Include with tax return | Attach a copy to your income tax return for the year |
It's crucial to note that the 83(b) election must be filed within 30 days of receiving the token grant. This deadline is strict and non-negotiable.
As of 2023, the IRS allows e-signatures on 83(b) elections, making the process more accessible.
83(b) Election: Benefits vs. Considerations
Benefits | Considerations and Potential Drawbacks |
|---|---|
Pay taxes when token value is potentially lower | Must pay taxes immediately on the full grant value |
Avoid higher taxes if token value increases | If token grant value decreases, you've overpaid taxes with no refund option |
Simplify tax planning with one-time tax event | If you leave before full vesting, you've paid taxes on tokens never received |
Start long-term capital gains holding period earlier | May need to sell tokens or use personal funds to pay the tax bill |
Avoid "phantom income" problem at vesting | Determining fair market value of early-stage tokens can be difficult |
Potentially convert ordinary income to capital gains | The 30-day filing deadline is strict and non-negotiable |
Avoid liquidity issues at vesting milestones | Election cannot be revoked once made |
Eligibility Requirements for 83(b) Elections
Not all token compensation structures qualify for 83(b) elections. To be eligible:
The tokens must be considered "property" under tax law
The property must be subject to a "substantial risk of forfeiture"* or be non-transferable
The tokens from the grant must be actually transferred to the recipient (though they can be held in escrow)
Restricted Token Awards (RTAs) are compatible with 83(b) elections because they involve actual tokens subject to vesting schedules and forfeiture conditions.
However, the following structures are generally not eligible:
Restricted Token Units (RTUs), which are promises to deliver tokens in the future;
Token Options, unless early-exercised to acquire actual tokens;
Future Token Interests (FTIs) may be eligible according to some law firms, but this remains a novel and contested area;
*A “substantial risk of forfeiture” means you could lose your tokens if certain conditions aren’t met—like staying with the company for a set period or hitting specific performance goals. If you leave early or don’t meet those goals, you might forfeit (lose) the unvested tokens. This risk is what makes the grant eligible for an 83(b) election.
Conclusion
The 83(b) election represents a powerful tax planning strategy for founders and employees receiving vesting tokens. When used appropriately, it can result in substantial tax savings and simplified compliance.
However, the decision requires careful consideration of individual circumstances, token valuation, and future projections.
For those interested in managing and tracking their company's token vesting, specialized platforms like TokenOps can provide invaluable assistance. These platforms offer comprehensive solutions for token operations and lifecycle management, ensuring compliance, efficiency, and transparency throughout the vesting process.
DISCLAIMER: This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. Readers should consult with qualified tax professionals, attorneys, or financial advisors before making any decisions regarding 83(b) elections or token vesting arrangements.
About TokenOps
TokenOps.xyz is a comprehensive token operations and lifecycle management platform. We empower teams to create and manage on-chain token distributions with precision and compliance.
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Global Tax Withholding: Navigate international tax compliance seamlessly during token distribution operations, ensuring regulatory adherence across jurisdictions
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