An 83(b) election lets you choose to be taxed on restricted stock when you receive it, rather than as it vests. For founders and early employees who buy stock at a low price, that often means reporting little or no income up front and treating future growth as capital gain. The election must be filed with the IRS within 30 days after the stock is transferred to you, and that deadline cannot be extended.
Few startup paperwork mistakes are as expensive or as permanent as a missed 83(b) election. A founder who receives vesting stock at a fraction of a cent per share can face ordinary income tax on the stock’s full value at each vesting date if no election is made, often when there is no cash to pay it. Here is what the election does, when it is available, and the risks to weigh.
What Section 83(b) Actually Covers
Section 83 of the Internal Revenue Code taxes property received in connection with services. When that property is subject to a “substantial risk of forfeiture,” such as stock the company can repurchase at cost if you leave before vesting, the default rule delays taxation until the risk lapses. At each vesting date you recognize ordinary income equal to the stock’s then-current value minus what you paid.
An 83(b) election flips that default. You include the value of the stock in income in the year it is transferred, measured as its fair market value at that time minus the amount you paid. If you paid full fair market value, the taxable income is zero. Later vesting events are not taxable, and appreciation is generally taxed as capital gain when you sell.
The election is available for property actually transferred to you and subject to vesting, most commonly:
- Founder stock issued under a restricted stock purchase agreement
- Restricted stock granted or sold to early employees and advisors
- Stock acquired by early exercising unvested stock options
- LLC profits interests, where a protective election is common practice
Correcting a Common Myth: Options and RSUs
An earlier version of this article said an 83(b) election could be filed for stock options or restricted stock units and would let you sell or transfer options immediately. That is incorrect. An unexercised stock option is a right to buy stock, not a transfer of the stock itself, so there is nothing to elect on until you exercise. A restricted stock unit is a promise to deliver shares or cash later, and no property is transferred until settlement, so 83(b) does not apply. Neither election changes whether you can sell or transfer an option.
The route to 83(b) for option holders is early exercise. If your plan lets you exercise before vesting, you receive restricted stock, and you can file an 83(b) election within 30 days of that exercise. For incentive stock options, the election mainly matters for alternative minimum tax purposes, so get tax advice first. Our comparison of RSUs vs. stock options explains the differences between these awards.
Why the Election Can Be So Valuable
- Little or no tax up front. Founders typically buy stock at a nominal price equal to its value, so the income reported is often zero.
- No tax as shares vest. Without an election, each vesting date can trigger ordinary income on a rising value, with no shares sold to fund it.
- Capital gain holding period starts early. Your long-term capital gain clock starts at transfer rather than at each vesting date.
- QSBS planning. For stock that may qualify as qualified small business stock, the election can affect when the stock is treated as acquired for holding-period purposes. See our overview of the qualified small business stock exclusion.
The Risks and Downsides
An 83(b) election is not always the right call. Weigh these points:
- You pay tax on stock you might forfeit. If the stock has meaningful value when you receive it, you owe tax now on shares you may never fully earn.
- No refund on forfeiture. If you leave and the company repurchases unvested shares, you cannot deduct the income you previously reported. Any loss is generally limited to what you actually paid.
- It is irrevocable. Once filed, the election generally cannot be revoked without IRS consent.
- Value can be hard to pin down. If stock is issued after a priced round or at a discount, the taxable spread may be significant, and the valuation should be documented.
How to File an 83(b) Election
- Prepare the election. It must include your name, address, and taxpayer ID, a description of the property, the transfer date and tax year, the nature of the restrictions, the fair market value at transfer, the amount paid, and a statement that copies have been furnished as required. The IRS released Form 15620 for this purpose, though a properly drafted statement also works.
- File within 30 days of the transfer. Send it to the IRS office where you file your return, using certified mail with return receipt, or use the IRS online filing option if it is available to you. Do not wait until day 29.
- Give a copy to the company. Your employer or the issuing company needs a copy for its records.
- Keep proof forever. Retain the signed election and mailing or electronic confirmation. Acquirers and auditors routinely ask for it during diligence.
Since 2016 you no longer need to attach a copy to your federal tax return. State treatment varies; California generally follows the federal result, but confirm any state requirements with your tax advisor. Companies should build 83(b) reminders into every restricted stock issuance and track elections alongside their cap table.
Special Situations
Investors in a financing sometimes require founders to re-vest shares they already own. Because that can create new forfeiture restrictions, founders often file a protective 83(b) election at that point. The same caution applies when vesting terms are modified in a reorganization or acquisition.
The Takeaway
For founders and early holders of restricted stock with little current value, an 83(b) election is usually one of the most valuable filings they will ever make. It applies only to property actually transferred, such as restricted stock or early-exercised options, not to unexercised options or RSUs. The 30-day deadline is unforgiving, so file early, confirm delivery, and keep the proof.
Frequently Asked Questions
What is the deadline for an 83(b) election?
The election must be filed with the IRS within 30 days after the stock or other property is transferred to you. The IRS does not grant extensions. Missing the deadline generally means vesting will be taxed under the default rules.
Can I file an 83(b) election for stock options or RSUs?
No. An unexercised option and an RSU do not involve a transfer of property, so there is nothing to make the election on. If your plan allows early exercise, the stock you receive on exercise can be the subject of an 83(b) election.
What happens if I file an 83(b) election and then forfeit my shares?
You cannot recover the tax paid on the income you reported. Any loss is generally limited to the amount you actually paid for the shares. That is why the election is most attractive when the taxable amount is small.
Do I still have to attach the 83(b) election to my tax return?
No. Treasury regulations removed that requirement for elections made on or after January 1, 2016. You should still keep the election and proof of filing permanently and give a copy to the company.
How Sutter Law Can Help
We prepare founder stock and restricted stock documents with 83(b) elections built into the closing process, and we help companies clean up equity records before financings and exits. If you have received restricted stock or are planning a founder issuance, contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
