83(b) Elections for Crypto: Avoid Million-Dollar Mistakes

In Web3 compensation, timing is everything—especially when it comes to taxes. And few tax decisions carry more weight (or risk) than the Section 83(b) election.

For thousands of builders, founders, and early contributors in crypto, token-based compensation can be life-changing. A single grant might one day be worth millions—if managed correctly. 

But here’s the catch: if you don’t file your 83(b) election properly, you could lose a large portion of that value to the IRS before you ever sell a single token.

Most workers receiving crypto grants don’t realize that U.S. tax law treats these tokens just like restricted stock—as property, not currency. That means when you receive or vest tokens, the IRS expects you to recognize their fair market value (FMV) as income. 

Without an 83(b) election, that income gets taxed later—often when your tokens are worth exponentially more. The result?

A tax bill you can’t pay in cash for tokens you can’t yet sell.

The 83(b) election is designed to prevent that scenario. By electing to pay taxes on the token’s value at the moment of the grant—often when it’s nearly worthless—you lock in a lower taxable base and preserve the opportunity for long-term capital gains treatment later on.

But there’s a problem: many crypto workers file incorrectly, or not at all.

From missed deadlines and ineffective transfers to inadequate documentation, crypto 83(b) elections fail more often than people think. And when they do, the IRS doesn’t forgive mistakes. A single missed form or late submission can mean millions in unnecessary taxes, compounded by penalties and interest.

At Toku, we’ve seen firsthand how confusing this process can be for token-issuing companies and workers alike. The complexity of token grant structures, the lack of standard valuation data, and the differences between on-chain and off-chain vesting all make compliance tricky. 

Yet with the right systems and expertise, companies can avoid costly errors and structure token compensation programs that are fully IRS-compliant.

In this deep dive, we’ll cover everything you need to know:

• How 83(b) elections work for crypto token grants.
• Why timely filing matters (and why the IRS offers zero leniency).
• Real-world examples showing how the math plays out.
• The top ways crypto 83(b)s fail—and how to prevent it.
• How Toku’s token-grant administration ensures compliance, recordkeeping, and peace of mind.

If you’ve ever received or issued crypto token grants in the U.S., this guide could save you—or your contributors—from a devastating tax mistake.

What Is a Section 83(b) Election for Crypto Token Grants?

When you receive restricted crypto tokens—whether through a Restricted Token Award (RTA) or Token Purchase Agreement (TPA)—the IRS considers this compensation, not a gift. In U.S. tax law, anything that has potential value and is given in exchange for services is income.

That’s where Section 83(b) of the Internal Revenue Code comes in. It’s a short, powerful election that lets recipients control when their income is recognized for tax purposes. For crypto contributors and employees, this election can mean the difference between paying taxes on $1,000 today or $1,000,000 later.

How It Works in Practice

When a company issues restricted tokens, they usually come with vesting conditions—say, 25% after one year and the rest monthly over three years.

Without an 83(b) election, you’ll be taxed each time tokens vest. If the token’s value rises dramatically, your taxable income increases with every vesting milestone.

By filing an 83(b) election, you’re telling the IRS:

“I want to pay tax on these tokens now, at today’s low value, instead of later when they might be worth much more.”

Here’s how it plays out:

By locking in the grant’s fair market value (FMV) early, you convert what would’ve been ordinary income (up to 37%) into potential long-term capital gains (up to 20%) on future appreciation.

Why It Matters for Token Grants

Unlike traditional equity, crypto tokens aren’t issued on paper—they live on-chain. That makes documentation, timing, and compliance even more critical.

If a token isn’t effectively transferred (meaning you don’t yet have full rights to use or control it), your 83(b) election might not even count.

Moreover, crypto’s volatility adds an extra layer of complexity. A token worth $0.01 today could be worth $1.00—or nothing—in a year. Filing the election means paying taxes upfront on something that might never materialize in value.

Yet for high-potential projects, it’s often worth it. An early, properly filed 83(b) can save you millions in future taxes if the project succeeds.

Key Takeaway

A Section 83(b) election is more than a tax form—it’s a strategic financial decision. For crypto professionals, it can mean the difference between massive tax efficiency and devastating overpayment.

But it’s also a compliance minefield: one missed step, and your election becomes invalid.

That’s why forward-thinking Web3 companies rely on Toku’s Token Grant Administration (TGA) system—to track token grants, manage 83(b) elections, and ensure compliance from issuance through vesting.

How the IRS Treats Cryptocurrency and Why It Matters for 83(b) Elections

Before diving deeper into how Section 83(b) elections work for token grants, it’s important to understand how the Internal Revenue Service (IRS) views cryptocurrency.

Since IRS Notice 2014-21, digital assets like Bitcoin, Ethereum, and other tokens have been officially classified as property for tax purposes—not currency. That single definition has shaped every U.S. tax rule for crypto since.

Crypto Is Property — Not Money

When the IRS says crypto is “property,” it means that every time you receive, sell, or exchange a digital asset, you’ve likely triggered a taxable event.

This is true whether you’re trading Bitcoin for Ethereum, selling tokens for cash, or even receiving tokens as part of your compensation.

Here’s how that translates in practice:

• Buying crypto is not taxable.
• Selling crypto or swapping one token for another is a taxable event, generating a capital gain or loss.
• Receiving crypto as payment for services is considered ordinary income, taxable at your regular income tax rate.

This framework treats crypto more like stock or real estate than like money. It’s why token-based compensation and token grants are subject to the same IRS sections that apply to restricted stock—particularly Section 83.

Why Section 83 Applies to Token Grants

Under U.S. tax law, when an employee or service provider receives property (in this case, crypto tokens) that’s subject to vesting or forfeiture, Section 83 applies.

That means:

• You don’t recognize income at the time of grant unless you file an 83(b) election.
• You’ll instead recognize income each time tokens vest—based on their fair market value (FMV) at that moment.

For early-stage crypto projects, this creates a real problem. Tokens might be worth fractions of a cent when granted, but if the project succeeds, they could be worth dollars when they vest. The tax bill skyrockets, even though the tokens might still be illiquid.

That’s where Section 83(b) provides an elegant solution. It allows you to opt in to immediate taxation at grant, locking in today’s lower value—and future gains get taxed at capital gains rates, not ordinary income rates.

Why Timing and Recordkeeping Are Crucial

Cryptocurrency introduces a layer of complexity unseen with traditional stock: valuation and liquidity. Unlike stock in a private company, there’s rarely a clear, IRS-approved method for determining the fair market value of a newly issued token.

Founders and companies must document:

• The exact time and date of token grant
• The token’s FMV at that time (based on reliable exchange or valuation data)
• The vesting schedule and forfeiture conditions
• Whether the tokens are transferable, stakable, or subject to lockups

Without clear records, an IRS audit could challenge the validity of your 83(b) election or recharacterize your income.

That’s why leading crypto companies and DAOs use Toku’s token grant infrastructure—to timestamp, document, and archive every token issuance, FMV calculation, and 83(b) filing, ensuring long-term defensibility.

The Crypto-Stock Comparison

In short: the same rules apply, but crypto’s volatility and on-chain characteristics make execution much harder.

Key Takeaway

Every crypto token grant is a property transfer with potential tax implications. Without an 83(b) election, you’re deferring taxes until vesting—when values may have multiplied.

With it, you can minimize future exposure, but only if you file correctly and on time.

Next up: we’ll look at how Section 83(b) applies specifically to restricted crypto tokens, and why the structure of RTAs and TPAs determines how (and when) your taxes hit.

How Section 83(b) Applies to Restricted Crypto Tokens

When tokens are granted as part of a compensation plan, the IRS doesn’t treat them as “just crypto.” It treats them as restricted property under Section 83 of the Internal Revenue Code — just like restricted stock.

If those tokens are subject to vesting, lockups, or forfeiture conditions, the recipient doesn’t immediately own them outright. And until those restrictions lapse, any increase in value between grant and vesting can create taxable income events unless an 83(b) election is filed.

Restricted Token Awards (RTAs) and Token Purchase Agreements (TPAs)

In the crypto world, most token-based compensation falls into two categories:

1. Restricted Token Awards (RTAs): Tokens are granted outright, but they vest over time or based on milestones. The worker gains ownership only after meeting specific conditions.
2. Token Purchase Agreements (TPAs): The worker or contributor purchases tokens at a nominal price, often close to zero, with similar vesting or forfeiture restrictions.

Both types of arrangements are considered “restricted property” under Section 83 — meaning the IRS can tax them once they vest unless the worker elects to recognize income earlier via an 83(b) election.

How the Election Changes the Tax Timing

Here’s the fundamental choice crypto workers face:

Without the election, each vesting milestone is a new taxable event. With it, the worker pays once — immediately — and converts future appreciation into long-term capital gains.

Example: The Cost of Waiting

Let’s revisit a simplified example.

Imagine a contributor receives 100,000 restricted tokens at a grant-date FMV of $0.01 per token.

• With 83(b): The contributor pays tax on $1,000 (100,000 × $0.01). Any future increase in value is taxed at capital gains rates upon sale.
• Without 83(b): The contributor waits until vesting. By then, each token is worth $1.00. The contributor owes tax on $100,000 of ordinary income, potentially at a 37% federal rate — $37,000 in tax on tokens that may still be illiquid.

That’s the difference between paying hundreds of dollars now or tens of thousands later.

Vesting, Liquidity, and Lockups: A Dangerous Combination

Crypto adds a level of complexity that traditional stock doesn’t face.

Many projects issue tokens that aren’t immediately tradable — either because of lockup agreements, thin markets, or on-chain vesting mechanics.

This means that when a token vests, the worker might owe taxes on a large paper gain without the ability to sell anything to cover that tax bill.

That’s one of the main reasons Toku advises clients to evaluate 83(b) elections carefully — especially for early-stage token projects where liquidity is uncertain.

Why Employers Must Also Pay Attention

83(b) elections don’t only affect workers — they impact employers too.
If a worker fails to file, or if the company mishandles the token transfer, the IRS can pursue the employer for uncollected withholding taxes.

That’s why crypto companies must:

• Track all token grants and vesting schedules.
• Record FMV at each grant and vesting date.
• Retain all 83(b) filings for future audits or due diligence.

Toku’s Token Grant Administration (TGA) platform automates this process — ensuring that every 83(b) election is filed on time, stored securely, and linked to the underlying token issuance.

Key Takeaway

For crypto workers, the 83(b) election is a tax strategy. For employers, it’s a compliance obligation.

Both sides need airtight tracking, documentation, and legal precision. And with the IRS showing increased scrutiny of token-based compensation, the margin for error has never been smaller.

Real-World Examples: How 83(b) Elections Work (and Fail) in the Crypto Context

The easiest way to understand the 83(b) election is to see it in action.
Below are three realistic examples based on situations we often encounter at Toku — showing how timing, project success, and valuation dramatically impact tax outcomes.

Example 1: The Early-Stage Token Project

Scenario: An engineer joins a new blockchain startup and receives 100,000 restricted tokens as part of their compensation. At the time of grant, the token is valued at $0.02 per token, but it’s expected to launch publicly within 18 months.

• With 83(b) election: The engineer files within 30 days and pays income tax on $2,000 (100,000 × $0.02). When the token later trades at $2.00, the future appreciation counts as capital gains, not ordinary income. The total tax due on eventual sale is roughly $59,600 less than it would have been without the election.
• Without 83(b) election: The engineer waits. By the time the tokens vest, the FMV is $2.00 each. They now owe tax on $200,000 of ordinary income, potentially 37% federally plus state tax — about $74,000 in total. Worse, the tokens are still locked and cannot be sold to pay the bill.

Takeaway: For early-stage token grants with low starting values and high upside, a timely 83(b) election can reduce future tax exposure dramatically — often by tens of thousands of dollars.

Example 2: The Mid-Stage Project with Volatile Markets

Scenario: A contributor joins a well-known DeFi protocol during its Series A round. They receive 50,000 restricted tokens at an FMV of $1.00 per token. The token is already trading on exchanges but highly volatile.

• With 83(b) election: The contributor files immediately and pays tax on $50,000 of income. Six months later, the token’s price falls to $0.20 due to a market crash. They’ve already paid tax on a value that no longer exists — and cannot reclaim those taxes.
• Without 83(b) election: If they skip the election and the token’s price continues falling, they end up being taxed later on a smaller amount at vesting. Their risk exposure is lower — but if the token rebounds, their future taxes increase accordingly.

Takeaway: When the token’s FMV at grant is already high or volatile, an 83(b) election can backfire. The decision depends on risk tolerance, liquidity expectations, and project maturity. Always consult a crypto-savvy tax advisor before filing.

Example 3: The Failed Project

Scenario: A marketing consultant receives 200,000 restricted tokens from a new project, valued at $0.05 per token. They believe in the team and file an 83(b) election, paying income tax on $10,000 of phantom income. One year later, the project collapses, and the tokens become worthless.

Outcome: Because the IRS doesn’t allow refunds for lost or devalued tokens following an 83(b) election, the consultant cannot recover the $10,000 already paid. The election was valid, but the outcome was financially negative.

Takeaway: An 83(b) election is a strategic gamble. You’re betting that the tokens’ value will rise — not fall. If the project fails, your early tax payment becomes a sunk cost.

What These Examples Teach Us

Across these three cases, the key lessons are consistent:

The 83(b) election isn’t a formality; it’s a high-impact tax strategy that must be supported by airtight recordkeeping.

That’s why companies use Toku’s token-grant administration tools — to track every grant, FMV, vesting, and filing, ensuring no missed deadlines or lost forms.

Why Make a Section 83(b) Election with Crypto?

If you’ve ever joined a startup, you’ve probably heard someone say, “Don’t forget your 83(b)!”

In the world of crypto compensation, that advice is even more critical — because the timing of your tax election can determine whether you build generational wealth or lose half of it to the IRS.

The purpose of a Section 83(b) election is simple: to pay tax on your tokens when they’re worth almost nothing, so you don’t get crushed later when they skyrocket in value.

Accelerate Your Taxable Event, Defer Your Tax Pain

When you receive restricted crypto tokens that vest over time, you don’t technically “own” them yet. The IRS taxes you when each portion vests — based on the token’s fair market value (FMV) at that date. If the token’s value grows, so does your tax bill.

By filing a Section 83(b) election, you accelerate your taxable event to the grant date. This means:

• You pay income tax right away on a smaller amount.
• You start your long-term capital gains holding period immediately.
• Any future appreciation is taxed at the lower capital gains rate instead of ordinary income rates.

For high-growth crypto projects, that difference can be enormous.

Numerical Example: The Power of Early Taxation

Let’s take a simple case.

The person who filed an 83(b) paid $1,850 in taxes upfront. The one who didn’t owes $74,000, often before being able to sell any tokens to generate cash.

That’s a 40× difference — all determined by a 30-day filing deadline.

The Advantage for Founders and Early Employees

Early contributors and founders are uniquely positioned to benefit from 83(b) elections because they typically receive tokens when:

• The project’s valuation is low.
• The token isn’t yet publicly tradable.
• The risk-reward ratio heavily favors upside.

Filing early means you’re paying tax on pennies while preserving long-term capital gains treatment on future appreciation. This strategy aligns your tax position with your belief in the project’s success.

Why It Matters for Employers Too

While 83(b) elections are filed by individuals, employers also benefit when their workers make them. Proper elections simplify future reporting, reduce ambiguity around taxable vesting events, and strengthen compliance records during audits or M&A due diligence.

Employers are responsible for retaining copies of all 83(b) filings for at least seven years. Missing documentation or invalid elections can expose companies to withholding liabilities and complicate investor audits.

That’s why leading Web3 companies use Toku’s Token Grant Administration (TGA) to automatically:

• Track token grant issuance and vesting.
• Record election filing status and timestamps.
• Archive filings for future diligence or regulatory review.

When an 83(b) Election Makes Sense

Filing an 83(b) election usually makes sense when:
✅ The token’s value is very low at grant.
✅ You’re confident in the project’s long-term success.
✅ You can afford to pay the upfront income tax (even if the token later loses value).
✅ The token has clear vesting conditions and eventual liquidity.

It may not make sense when:
⚠️ The token’s FMV is already high or volatile.
⚠️ The project’s success or liquidity is uncertain.
⚠️ You lack cash to cover the upfront tax burden.

BONUS: The Toku Insight

At Toku, we often tell clients:

“An 83(b) election isn’t about tax avoidance — it’s about timing your compliance to maximize your financial efficiency.”

When managed correctly, it’s one of the most powerful tools for aligning token compensation with long-term value creation. When mismanaged, it’s one of the costliest mistakes in crypto compensation.

Frequently Asked Questions About 83(b) Elections

1. What exactly is an 83(b) election for crypto tokens?

An 83(b) election lets you choose to pay income tax on the fair market value of your tokens at the time they’re granted, instead of waiting until they vest.

This can significantly lower your tax burden if the tokens increase in value later.

2. How long do I have to file an 83(b) election?

You must file your 83(b) election within 30 days of your grant date — no exceptions, no extensions. If you miss that window, the IRS will not accept your filing, and you’ll be taxed at vesting when your tokens may be worth far more.

3. What happens if I don’t file an 83(b) election?

If you skip or miss the filing, you’ll pay ordinary income tax every time your tokens vest, based on their fair market value at that moment.

This can result in massive tax bills if the token appreciates and is still locked or illiquid.

4. Can I file an 83(b) election electronically with the IRS?

No. As of 2025, the IRS requires that 83(b) elections be filed by mail to your regional IRS service center. You must include your signed election statement, cover letter, and proof of mailing — ideally via certified mail with return receipt.

5. What if my crypto project fails after I file the election?

Unfortunately, if your tokens lose value or the project collapses, you can’t reclaim the taxes you already paid on your 83(b) election. You’re taxed on the token’s value at the time of grant, even if that value later drops to zero.

6. Do companies need to keep 83(b) election records?

Yes. Employers are legally required to retain copies of all 83(b) elections filed by their workers. If these records are missing during an audit or investment due diligence, the employer could face withholding liabilities or delays in closing funding rounds.

7. Can token grants qualify for long-term capital gains?

Yes — but only if you file an 83(b) election and hold the tokens for at least one year after the grant date. Without the election, the holding period for capital gains starts only after each vesting event, which delays your eligibility for lower tax rates.

8. How can Toku help with my 83(b) elections?

Toku automates the entire compliance workflow for token grants and 83(b) filings:

• Tracks each restricted token grant and vesting schedule.
• Calculates the token’s fair market value (FMV) at grant.
• Stores election copies securely for audits and investor reviews.
• Integrates tax and withholding data across jurisdictions.

With Toku, you never miss a deadline, lose a filing, or risk an invalid election.

Secure Your Token Future Before the IRS Takes a Share

An 83(b) election isn’t just paperwork — it’s the single most important tax decision most crypto founders, early employees, and contributors will ever make.

When done correctly, it locks in lower taxes, long-term capital gains treatment, and the peace of mind that your compensation won’t turn into a financial burden.

When done poorly — or not at all — it can cost you millions in avoidable taxes and years of compliance headaches.

The reality is simple:

• The IRS offers no forgiveness for late or invalid filings.
• A token grant without proper documentation can trigger future audit risks.
• Employers remain liable for errors if elections fail due to poor recordkeeping.

That’s why every forward-looking crypto company should build compliance into its compensation infrastructure from day one.

At Toku, we help organizations across the Web3 ecosystem automate every step of the 83(b) process — from tracking restricted token grants and filing elections to recording fair market valuations and retaining documents for tax and investor due diligence.

When it comes to token compensation, the cost of inaction is always higher than the cost of doing it right.

Don’t leave your financial future to chance or your 83(b) election to guesswork. Make your next token grant fully compliant, auditable, and optimized for long-term success.

📩 Talk to Toku today — and make sure your next 83(b) election works for you, not against you.