Section 83(b) Elections: What Startup Founders and Employees Need to Know

The Section 83(b) election is a provision in the U.S. tax code that allows recipients of restricted stock to accelerate the recognition of ordinary income to the date of grant rather than when the stock vests. When you file an 83(b) election, you choose to pay income tax on the fair market value of the shares at the time they are issued, rather than when they vest. This can be beneficial for early‑stage companies whose stock has little value at the time of grant, because you lock in a low tax basis and convert future appreciation into capital gains.

For founders and employees receiving restricted stock with a vesting schedule, the timing of tax recognition can have a significant impact on your future tax bill. Without an 83(b) election, you would owe ordinary income tax as your shares vest, based on their fair market value at each vesting date. If the company’s value increases rapidly, this could mean large amounts of ordinary income tax. By filing an 83(b) election within 30 days of receiving the shares, you pay tax up front—often on a nominal value—and any gain upon sale (after meeting holding period requirements) is taxed at favorable capital gains rates.

Here is a simplified example. Suppose you receive 100,000 shares of restricted stock subject to a four‑year vesting schedule, valued at $0.001 per share on the date of grant. If you file an 83(b) election, you include $100 of ordinary income on your current-year tax return (100,000 × $0.001) and pay tax now. If the company later goes public and the shares are worth $10 each at vesting, you do not pay ordinary income tax at vesting; instead, you pay capital gains tax on the difference between your $0.001 basis and the sale price when you sell the shares. If you do not file the election, you would owe ordinary income tax on $10 per share as they vest.

Filing an 83(b) election is time‑sensitive and irrevocable. You must file the election with the IRS within 30 days of the date the stock is transferred to you (usually the date of the grant) and send a copy to the company. There are no extensions. The election consists of a simple letter that identifies the taxpayer, the property and its fair market value, and your intent to make the election. Many practitioners recommend sending the IRS copy via certified mail with a return receipt and retaining copies for your records.

While powerful, an 83(b) election is not always the right choice. If the company never increases in value or you leave before your shares vest, you may end up paying tax on income you never realize, and you cannot claim a refund. In addition, stock options (unless exercised early) and other forms of equity compensation may not be eligible. Always consult your tax advisor to determine whether an 83(b) election makes sense for your specific circumstances.

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Tax laws are complex and subject to change. Consult with a qualified attorney or tax professional before making any decisions regarding equity compensation or Section 83(b) elections.

Update: In 2024, the IRS introduced a new form, Form 15620, which allows founders and employees to file their Section 83(b) election electronically. You can now submit your election through your IRS online account instead of mailing a paper letter. The rules remain the same: you must file within 30 days of the stock transfer, the election applies only to restricted stock, and you should keep copies for your records. Always consult your own tax adviser before using the new form.