In the fast-moving world of Web3, timing can be everything—especially when it comes to taxes. One of the most beloved tax tools in the industry is the Section 83(b) election, a mechanism that can dramatically reduce long-term tax exposure for individuals receiving token compensation. Whether you’re a founder, early contributor, or advisor in a token project, understanding the 83(b) election could mean the difference between a manageable tax bill and a financial headache.
How are you taxed If You Don’t File an 83(b) Election
When token compensation is subject to vesting and no 83(b) election is filed, the IRS treats each vesting event as a taxable moment. That means each time a portion of your tokens vests, you’re taxed on the fair market value of those tokens at the time they vest, which usually is post-TGE —regardless of whether you sell them or not.
This can create a significant problem: if the token appreciates in value between the grant date and each vesting date (as often happens in successful projects), you could owe ordinary income taxes on high value tokens that you haven’t sold—and possibly can’t sell—leaving you with a large tax bill and no liquidity.
What Happens If You Do File an 83(b) Election
Filing an 83(b) election flips the script. You elect to recognize income at the time of grant, pre-TGE, when the token value is highly speculative and normally rather low, rather than waiting until tokens vest. That means you pay ordinary income tax based on the fair market value of the tokens when they are granted, even though you don’t yet fully own them.
The upside is significant: if the value of the tokens is low at the time of grant (common in early-stage projects), your income tax liability is minimized. From there, any appreciation is typically treated as long-term capital gains, assuming you meet the holding period requirements—a much more favorable tax rate than ordinary income.
Critical Timelines
Timing is everything. The 83(b) election must be filed within 30 days of the grant date—no exceptions, no extensions. Miss that window, and the opportunity to make the election is lost permanently.
In addition, there needs to be a minimum of 45-60 days “cool off period” between the token grant date and any date that prices the token (either a SAFT, Token Sale or public listing of the token).
Risks of Not Filing an 83(b) Election
The risks of skipping the 83(b) election are real and often underestimated:
- Surprise tax liability: If the token’s value rises significantly, each vesting event becomes a potentially painful taxable event—often without corresponding liquidity.
- Liquidity Constraints: If your tax bill is large and you are unable to satisfy this bill without liquidating your tokens, you may be forced to sell those tokens in an illiquid market, causing significant downward pressure on the market price.
- Community Backlash: If the project’s community learns of a founder selling their tokens, this could be interpreted as the founder losing confidence in the project. This can lead to reputational damage, or worse, community participants selling their tokens, causing additional downward pressure on the token price.
In short, failure to file can turn a simple equity incentive into a complex tax burden with unwanted consequences.
Conclusion: Plan Ahead
The 83(b) election is a powerful tool for those receiving token compensation, offering significant tax advantages when used correctly and within the proper timeframe. Filing early, supported by a reliable token valuation, can help Web3 contributors lock in lower tax rates and avoid liquidity crunches and potential community backlash later on.
At Teknos Associates, we specialize in preparing defensible, audit-ready token valuations that support 83(b) elections. Our expertise ensures that your valuation meets IRS standards while giving you confidence in your tax planning. It is never too early to have a conversation.
The Power of the 83(b) Election for Token Compensation in Web3
In the fast-moving world of Web3, timing can be everything—especially when it comes to taxes. One of the most beloved tax tools in the industry is the Section 83(b) election, a mechanism that can dramatically reduce long-term tax exposure for individuals receiving token compensation. Whether you’re a founder, early contributor, or advisor in a token project, understanding the 83(b) election could mean the difference between a manageable tax bill and a financial headache.
How are you taxed If You Don’t File an 83(b) Election
When token compensation is subject to vesting and no 83(b) election is filed, the IRS treats each vesting event as a taxable moment. That means each time a portion of your tokens vests, you’re taxed on the fair market value of those tokens at the time they vest, which usually is post-TGE —regardless of whether you sell them or not.
This can create a significant problem: if the token appreciates in value between the grant date and each vesting date (as often happens in successful projects), you could owe ordinary income taxes on high value tokens that you haven’t sold—and possibly can’t sell—leaving you with a large tax bill and no liquidity.
What Happens If You Do File an 83(b) Election
Filing an 83(b) election flips the script. You elect to recognize income at the time of grant, pre-TGE, when the token value is highly speculative and normally rather low, rather than waiting until tokens vest. That means you pay ordinary income tax based on the fair market value of the tokens when they are granted, even though you don’t yet fully own them.
The upside is significant: if the value of the tokens is low at the time of grant (common in early-stage projects), your income tax liability is minimized. From there, any appreciation is typically treated as long-term capital gains, assuming you meet the holding period requirements—a much more favorable tax rate than ordinary income.
Critical Timelines
Timing is everything. The 83(b) election must be filed within 30 days of the grant date—no exceptions, no extensions. Miss that window, and the opportunity to make the election is lost permanently.
In addition, there needs to be a minimum of 45-60 days “cool off period” between the token grant date and any date that prices the token (either a SAFT, Token Sale or public listing of the token).
Risks of Not Filing an 83(b) Election
The risks of skipping the 83(b) election are real and often underestimated:
In short, failure to file can turn a simple equity incentive into a complex tax burden with unwanted consequences.
Conclusion: Plan Ahead
The 83(b) election is a powerful tool for those receiving token compensation, offering significant tax advantages when used correctly and within the proper timeframe. Filing early, supported by a reliable token valuation, can help Web3 contributors lock in lower tax rates and avoid liquidity crunches and potential community backlash later on.
At Teknos Associates, we specialize in preparing defensible, audit-ready token valuations that support 83(b) elections. Our expertise ensures that your valuation meets IRS standards while giving you confidence in your tax planning. It is never too early to have a conversation.