83(b) vs. QSBS: What Founders and Investors Should Know
If you’ve founded or invested in a company, you’ve probably heard both 83(b) and QSBS mentioned when people talk about tax planning. They both have the potential to save you a tremendous amount of money — but they apply at completely different stages in your company’s life.
Simply put, 83(b) is about how you’re taxed when you receive stock, while QSBS is about how you’re taxed when you sell it.
Both can be powerful, but the key is knowing how — and when — each applies.
Understanding the 83(b) Election
When you receive restricted stock that vests over time — which is common for founders and early employees — the IRS typically taxes you as your shares vest and increase in value. That can lead to massive tax bills later.
An 83(b) election flips the timing. By filing within 30 days of your stock grant, you choose to pay taxes immediately on the stock’s current value — which is usually negligible at that early stage. From that point forward, any increase in value is taxed as capital gains, not ordinary income.
The goal is simple: lock in a low tax basis early and avoid paying income tax on future growth.
If you miss that 30-day deadline, you lose the opportunity entirely. That’s why it’s one of the most time-sensitive filings for any founder or startup employee receiving equity.
Understanding QSBS
Qualified Small Business Stock (QSBS), found under Section 1202 of the Internal Revenue Code, is a completely different incentive. It applies when you sell stock in a C corporation that meets certain criteria.
If your stock qualifies as QSBS and you hold it for at least five years, you can exclude up to $10 million (or 10 times your investment) in capital gains from federal tax.
After the 2025 updates under the One Big Beautiful Bill Act, the exclusion cap rises to $15 million, and partial exclusions now apply if you sell after three or four years. The company must also have no more than $75 million in gross assets when the stock is issued, and it must operate as an active business, not a passive investment or holding company.
QSBS only applies to C-corps, not LLCs or S-corps. That’s why the choice of entity matters so much early on.
How They Work Together
The 83(b) election and QSBS can — and often should — work in tandem.
You file an 83(b) right after you receive your restricted founder shares, which locks in your low basis and starts your holding period for long-term capital gains. At the same time, if your company is structured as a C-corp and meets the QSBS requirements, that same stock can qualify for the QSBS exclusion when you eventually sell it.
This means that, with proper planning, you could pay almost nothing in federal tax when you exit — because your gain is both long-term and exempt under QSBS.
In other words: 83(b) helps you at the beginning; QSBS helps you at the end. Together, they form a complete tax strategy for founders and investors.
Which One Should You Prioritize?
If you’re early in your company’s life cycle, the 83(b) election should always come first. You only have a 30-day window to file it, and missing it can cost you heavily later.
QSBS, on the other hand, depends on your company’s structure and long-term plans. You can become eligible for QSBS later by converting to a C-corp, but you can’t retroactively file an 83(b).
For most founders:
File the 83(b) immediately when you receive restricted stock.
Make sure your company’s setup and capitalization qualify for QSBS going forward.
Handled correctly, you set yourself up for tax efficiency both at formation and at exit.
The Takeaway
Both 83(b) and QSBS are powerful, legitimate tax tools designed to reward people who take early risks in building companies. 83(b) protects you from unnecessary income tax when your equity is still worth little; QSBS rewards you for building long-term value in a qualified small business.
They’re not competing strategies — they’re complementary steps on the same path. Founders who understand both can structure their equity for maximum tax efficiency and long-term upside.
At WADR Law
We help founders, investors, and creative entrepreneurs set up and maintain equity structures that qualify for both 83(b) and QSBS benefits. From company formation to financing rounds and eventual exits, we ensure your corporate documents, stock issuances, and filings are aligned with your long-term tax strategy.
If you’ve just started your company or are planning your next raise, let’s make sure your structure works for you — not against you — when it comes time to cash out.