When you receive restricted stock or stock options from your company, you face an important tax decision that could save or cost you thousands of dollars. An [83(b) election allows you to pay taxes upfront on the fair market value of restricted equity](https://www.investopedia.com/terms/1/83b-election.asp) when it's granted rather than when it vests, potentially converting future gains from ordinary income to capital gains treatment.

The timing of this decision is critical because you only have 30 days from the grant date to file the election with the IRS. Missing this deadline means losing the opportunity forever, regardless of how beneficial it might have been for your tax situation.

Understanding when and how to make this election can significantly impact your overall tax burden, especially if your company's stock appreciates substantially over time. The IRS recently simplified the process by releasing Form 15620 in October 2024, making it easier for employees, founders, and contractors to take advantage of this tax strategy.

Key Takeaways

• The 83(b) election must be filed within 30 days of receiving restricted stock to pay taxes upfront instead of at vesting
• This strategy can convert future stock appreciation from ordinary income tax rates to more favorable capital gains rates
• The election carries risk because you pay taxes immediately even if the stock later becomes worthless or declines in value

Understanding the 83(b) Election

The 83(b) election is a tax provision that allows me to pay taxes upfront on restricted equity at today's fair market value rather than waiting until vesting. This election applies specifically to restricted stock awards and certain stock options that are subject to vesting schedules.

What Is the 83(b) Election?

The 83(b) election lets me pay taxes on stock now, at a lower value, potentially saving thousands in future taxes. When I receive restricted stock or equity compensation, I normally pay ordinary income tax on the fair market value when each portion vests.

With an 83(b) election, I choose to pay taxes immediately on the current fair market value instead. This means if my stock is worth $1 per share today but $10 per share when it vests, I only pay ordinary income tax on the $1 value.

Key benefits include:

• Locking in today's lower valuation for tax purposes
• Converting future appreciation to capital gains treatment
• Avoiding higher ordinary income tax rates on vested shares

The election works best when I expect significant stock appreciation. If the stock value decreases or I leave before vesting, I cannot recover the taxes already paid.

Section 83(b) of the Internal Revenue Code

IRC Section 83 governs the taxation of property transferred in connection with services. The default rule taxes restricted property as ordinary income when it vests based on fair market value at that time.

Section 83(b) provides an exception to this general rule. It allows me to elect to include the property's fair market value in gross income for the tax year I receive it, rather than when restrictions lapse.

The IRS requires specific information in my 83(b) election:

• Description of the property received
• Date of transfer
• Nature of restrictions
• Fair market value at transfer
• Amount paid for the property

I must file the election within 30 days of receiving the restricted property. Missing this deadline means I cannot make the election for that grant.

Who Is Eligible and When to File

The 83(b) election only applies if I am receiving stock that is subject to vesting. Common scenarios include startup founders receiving common stock with multi-year vesting schedules and startup employees receiving restricted stock awards.

Eligible individuals typically include:

• Startup founders with restricted founder shares
• Early employees receiving RSAs (Restricted Stock Awards)
• Service providers receiving restricted equity compensation

I must file the election within 30 days of the transfer date. The transfer date is when I receive the stock, not when it vests. I send the election to the IRS service center where I file my tax return.

Failing to file within the strict 30-day window has direct tax consequences. Without a valid election, I pay ordinary income tax on the fair market value when each portion vests, potentially at much higher rates.

Types of Equity Eligible for 83(b) Election

The 83(b) election applies to restricted property received in connection with services. The most common types include restricted stock awards and certain early-exercised stock options.

Restricted Stock Awards (RSAs) are the primary candidate for 83(b) elections. I receive actual shares immediately but they remain subject to forfeiture until vesting. The election allows me to pay tax on the current value rather than the potentially higher vesting-date value.

Early-exercised stock options may also qualify when I exercise unvested options and receive restricted shares. I pay the exercise price upfront but the shares remain subject to the company's repurchase right until vesting.

Standard stock options typically do not require 83(b) elections because I don't receive property until exercise. However, if I exercise before vesting and receive restricted shares, the election becomes relevant for those shares.

The key requirement is that I must receive actual property (shares) that is subject to substantial risk of forfeiture through vesting requirements.

83(b) Election Process and Compliance Requirements

The 83(b) election requires specific forms, strict deadlines, and proper documentation to ensure IRS compliance. Missing any step in the filing process can result in significant tax consequences and lost benefits.

83(b) Election Form and Key Filing Steps

I need to complete IRS Form 15620 to make a valid 83(b) election. This form replaced older methods and provides standardized requirements for Section 83(b) elections.

The form requires several key pieces of information:

I must provide accurate fair market value calculations at the grant date. This valuation determines my immediate tax liability and future capital gains treatment.

The IRS requires complete information on all requested fields. Incomplete forms may be rejected or deemed invalid.

Deadlines and Timely Filing

I have exactly 30 days from the grant date to file my 83(b) election. This deadline is strict and cannot be extended under any circumstances.

Failing to file within the 30-day window has direct tax consequences. Without a valid election, I'll pay ordinary income tax on the full fair market value when my stock vests.

The 30-day period starts on the date I receive the restricted property, not when I sign employment agreements. My grant date typically appears in my equity award documentation.

I should file immediately after receiving restricted stock rather than waiting. Processing delays or mail issues could cause me to miss the deadline entirely.

IRS Submission and Documentation

I can now file IRS Form 15620 online for a streamlined process. This electronic option provides faster processing and confirmation.

For paper submissions, I must send the form to the appropriate IRS service center. I should use certified mail with return receipt to prove timely delivery.

Required copies include:

• Original to IRS
• Copy with my tax return for the election year
• Copy to my employer
• Personal records copy

I need to maintain all documentation showing filing date and delivery confirmation. These records prove compliance if the IRS questions my election later.

My tax professional can help ensure proper completion and submission. Working with a tax advisor reduces errors that could invalidate my election.

Employer Notification and Recordkeeping

I must provide a copy of my completed 83(b) election to my employer. This notification helps them track elections and manage tax withholding obligations.

My employer needs this information to avoid IRS penalties and manage compliance requirements. They must track which employees made elections for their own recordkeeping.

I should deliver my employer copy immediately after filing with the IRS. Email delivery with read receipts provides documentation of timely notification.

My personal records should include:

• Filed form copies
• Certified mail receipts
• Employer delivery confirmation
• Fair market value calculations
• Grant agreements and documentation

These records become crucial during tax preparation and if the IRS requests verification. I'll need them to calculate capital gains when I eventually sell my vested shares.

Proper recordkeeping protects my election benefits and ensures compliance with ongoing tax obligations.

Tax Implications and Advantages

Making an 83(b) election creates immediate tax implications by accelerating the entire tax obligation to the year you file, regardless of vesting schedules. The election shifts how I pay taxes on equity compensation from ordinary income rates to potentially lower capital gains rates on future appreciation.

Ordinary Income Tax vs. Capital Gains Tax

When I make an 83(b) election, I pay ordinary income tax rates ranging from 10% to 37% on the fair market value of my restricted stock at the time of grant. This creates an immediate tax burden in the current tax year.

Without the election, I would pay ordinary income taxes on the stock's value at each vesting date. The stock's appreciation during the vesting period gets taxed as ordinary income, which can push me into higher tax brackets.

With 83(b) Election:

• Pay ordinary income tax upfront on current fair market value
• Future gains taxed as capital gains when I sell
• Potential access to long-term capital gains rates (0%, 15%, or 20%)

The tax advantage becomes significant when my stock appreciates substantially. Long-term capital gains rates are typically lower than ordinary income tax rates, especially for higher earners who face the maximum 37% ordinary income rate but only 20% long-term capital gains rate.

Tax Treatment of Equity Awards

The 83(b) election fundamentally changes when and how I recognize taxable income from equity awards. By including the fair market value in income for the election year, I establish my tax basis in the stock.

My cost basis equals the amount I paid for the stock plus the amount I included in taxable income. This basis determines my capital gain or loss when I eventually sell the shares.

Tax Treatment Timeline:

1. Grant Date: Make 83(b) election within 30 days
2. Election Year: Report fair market value as ordinary income
3. Vesting Dates: No additional taxable events
4. Sale Date: Pay capital gains tax on appreciation above basis

This approach eliminates the uncertainty of future tax liabilities. I know my exact tax payment upfront rather than facing potentially larger tax bills as the stock vests and appreciates.

Impact on Taxable Income and Tax Liabilities

The 83(b) election creates immediate cash flow implications by increasing my current year's taxable income. This increase can push me into higher tax brackets and affect other tax planning strategies.

Immediate Impact:

• Higher taxable income in election year
• Increased estimated tax payments may be required
• Potential impact on tax bracket and effective tax rate
• Cash needed to pay taxes without receiving liquid compensation

The tax strategy pays off when my stock appreciates significantly over time. Instead of paying ordinary income rates on the full appreciated value at vesting, I only pay capital gains rates on the appreciation above my established basis.

Long-term Benefits:

• Convert ordinary income to capital gains treatment
• Potential qualification for long-term capital gains rates after one-year holding period
• Reduced total tax burden if stock appreciates substantially
• Tax planning certainty for future years

The election works best when I expect substantial stock appreciation and can afford the upfront tax payment. The tax advantages diminish if the stock fails to appreciate or if I'm already in lower tax brackets where the difference between ordinary income and capital gains rates is minimal.

Strategic Considerations and Risks

An 83(b) election offers significant tax advantages for equity holders, but it also carries permanent consequences and potential financial risks. Understanding the timing requirements and irrevocable nature of this election is essential for making an informed decision.

Benefits of Making an 83(b) Election

The primary advantage I gain from filing an 83(b) election is immediate tax treatment on the fair market value at the time of my stock grant. This locks in my tax liability at current FMV rather than waiting until vesting.

When my stock appreciates significantly during the vesting period, I pay taxes only on the initial lower value. Any future gains become eligible for capital gains treatment instead of ordinary income rates.

For restricted stock with minimal current value, I can minimize my immediate tax burden while securing favorable treatment on future appreciation. This strategy works particularly well for early-stage startup equity.

Tax rate advantages become substantial when my stock value increases dramatically. Instead of paying ordinary income rates on the full appreciated value at vesting, I pay capital gains rates on the appreciation portion.

I also avoid alternative minimum tax complications that might arise from exercising stock options at higher future values. The AMT calculation becomes more predictable with an 83(b) election in place.

Potential Drawbacks and Limitations

The most significant risk I face is paying taxes upfront on value I might never realize. If my stock becomes worthless or decreases below the initial FMV, I cannot recover those tax payments.

Immediate cash flow impact can be substantial, especially with high-value stock grants. I must pay ordinary income taxes on the full fair market value at grant, regardless of whether I can sell the shares.

Stock value decreases after the election create a permanent loss situation. I cannot reclaim taxes paid on the higher initial value if shares drop in worth.

Forfeiture risk adds another layer of concern. If I leave the company before vesting, I lose both the stock and the taxes I already paid on its value.

Liquidity constraints in private companies mean I might pay substantial taxes without any ability to sell shares to cover the tax bill. This creates a cash flow burden that can persist for years.

Missed Deadlines and Irrevocability

The 83(b) election cannot be revoked once filed, making the decision permanent regardless of future circumstances. This irrevocable nature demands careful consideration before filing.

I have exactly 30 days from receiving my stock grant to file the election with the IRS. Missing this deadline eliminates the option entirely, with no extensions or exceptions available.

The filing must be complete and accurate, including copies to the IRS, my employer, and attached to my tax return. Incomplete filings can invalidate the entire election.

Documentation requirements are strict and unforgiving. I must include specific information about the stock grant, fair market value calculations, and restriction details in my filing.

Once the election is active, I remain committed to the tax treatment regardless of stock performance, company changes, or personal financial circumstances. This permanence requires confidence in both the stock's potential and my ability to pay the immediate tax liability.

83(b) Election in Practice

The 83(b) election applies differently across various equity compensation scenarios, with specific considerations for startup founders receiving restricted stock and employees exercising stock options early. Each situation requires understanding the timing, tax implications, and strategic benefits of making this election.

Examples for Startup Founders and Employees

Startup founders typically receive restricted stock subject to vesting schedules when they incorporate their company. I recommend founders make the 83(b) election to pay taxes upfront based on the grant-date value rather than waiting for vesting.

Founder Example:

• Receives 1 million shares at $0.001 per share
• Makes 83(b) election, pays taxes on $1,000 value
• Company grows to $10 per share at vesting
• Without 83(b): Owes taxes on $10 million ordinary income
• With 83(b): Owes capital gains taxes only on growth above $1,000

Employees receiving equity compensation face similar decisions. The 30-day filing deadline is absolutely critical for both founders and employees.

Employee Scenario:

• Joins startup, receives 10,000 restricted shares at $1 per share
• Company valued at $5 per share when shares vest
• 83(b) election saves $32,000 in taxes (assuming 28% tax rate on $40,000 difference)

Application to Restricted Stock and RSAs

Restricted stock awards (RSAs) represent the most common application of 83(b) elections. These awards grant actual stock ownership with vesting restrictions rather than options to purchase shares.

The default tax rules under Section 83 treat vesting events as taxable income at fair market value. Making an 83(b) election changes this timeline completely.

RSA Tax Treatment:

I've seen employees save significant amounts by filing 83(b) elections on RSAs, particularly in high-growth startups. The election works best when the current fair market value is low compared to expected future value.

Missing the 30-day window means you cannot make the election later. This strict deadline has direct tax consequences that I've witnessed cost employees thousands of dollars.

Early Exercise of Stock Options and ISOs

Stock options don't typically require 83(b) elections unless you exercise them before vesting. Early exercise provisions allow employees to buy unvested shares, creating restricted stock subject to repurchase rights.

Early Exercise Benefits:

• Starts capital gains holding period immediately
• Locks in current valuation for tax purposes
• Eliminates alternative minimum tax issues with ISOs

Incentive stock options (ISOs) present unique considerations. Early exercise of ISOs with an 83(b) election can help avoid AMT complications that arise when the spread between exercise price and fair market value grows large.

ISO Early Exercise Example:

• Employee receives 5,000 ISOs at $2 exercise price
• Current FMV is $2.10 per share
• Early exercise costs $10,000, 83(b) election covers $500 spread
• Avoids future AMT on potentially millions in spread

I advise clients to consider early exercise when they have confidence in the company's growth prospects and can afford the upfront exercise cost. The combination of early exercise and 83(b) election provides maximum tax efficiency for stock options.

The tax implications vary by equity type, making it essential to understand your specific situation before filing.

Frequently Asked Questions

The 83(b) election involves specific filing deadlines, tax return reporting procedures, and distinct advantages that can significantly impact your stock taxation outcomes. Understanding the filing requirements and potential electronic submission options helps ensure compliance with IRS regulations.

What are the steps to report an 83(b) election on my tax return?

I need to include the fair market value of the restricted stock on my tax return for the year I made the 83(b) election. This amount gets reported as ordinary income on Form 1040.

I must attach a copy of my filed 83(b) election to my tax return. The IRS requires this documentation to verify that I properly made the election within the required timeframe.

When I eventually sell the stock, I report any gain or loss as capital gains treatment. My cost basis becomes the fair market value I reported as income when I filed the election.

Can you give an example of how an 83(b) election impacts stock taxation?

Suppose I receive 1,000 shares of restricted stock valued at $1 per share that vest over four years. Without an 83(b) election, I pay ordinary income tax on $250 worth of shares each year as they vest.

With an 83(b) election, I pay taxes on the shares on the date of acquisition rather than when they vest. I immediately pay ordinary income tax on the full $1,000 fair market value.

If the stock price rises to $10 per share by the time all shares vest, I avoid paying ordinary income tax on the $9,000 appreciation. Without the election, I would owe ordinary income tax on the full $10,000 value as shares vest.

What are the advantages and disadvantages of making an 83(b) election?

The primary advantage is converting future ordinary income into capital gains treatment. I pay tax on the current fair market value and any future appreciation gets taxed at capital gains rates when I sell.

I can start my capital gains holding period immediately after filing the election. This potentially qualifies me for long-term capital gains treatment sooner than waiting for vesting.

The main disadvantage is paying tax upfront on stock I don't fully own yet. If I leave the company before vesting, I forfeit unvested shares but cannot recover the taxes I already paid.

I also face risk if the stock value decreases after making the election. I cannot claim a deduction for the decline in value of forfeited shares.

What are the specific filing requirements for an 83(b) election in California?

California generally follows federal tax treatment for 83(b) elections. I need to file the election with both the IRS and the California Franchise Tax Board within 30 days.

I must send the same election letter to California that I file with the IRS. The state requires identical documentation and timing for the election to be valid.

California taxes the fair market value as ordinary income in the same year I make the federal election. I report this amount on my California state income tax return.

What is the deadline for filing an 83(b) election after receiving restricted stock?

I must file the 83(b) election within 30 days of receiving the restricted stock grant. This deadline is strict and the IRS rarely grants extensions for late filings.

The 30-day period begins on the date I actually receive the stock, not when it's granted or when vesting begins. I need to count calendar days, not business days.

I should file the election as soon as possible after receiving the stock. Missing the 30-day deadline means I lose the opportunity to make the election permanently.

Is it possible to file an 83(b) election electronically, and if so, how?

The IRS does not accept electronic filing for 83(b) elections. I must send a physical paper letter to the IRS service center where I file my tax returns.

I need to mail the election via certified mail with return receipt requested. This provides proof of delivery and helps establish that I met the 30-day filing deadline.

The election letter must include specific information like my name, address, taxpayer identification number, and a detailed description of the transferred property. I should also send copies to my employer and keep records for my tax files.