83(b) Election

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83(b) Election

Key takeaways

  • An 83(b) election lets you elect to include the fair market value (FMV) of restricted stock or other property in taxable income at the time of transfer (grant) rather than when the property vests.
  • It can convert future appreciation into capital gains (potentially taxed at lower long‑term rates) and start the capital gains holding period at grant.
  • The election is irrevocable and must be filed with the IRS within 30 days of the transfer (for stock options, within 30 days of exercise).
  • It makes sense when FMV at grant is low and you expect substantial appreciation; it can cost you if the shares fall in value, are forfeited, or you leave before vesting.

What an 83(b) election is

Section 83(b) of the Internal Revenue Code allows a taxpayer who receives property subject to vesting (typically restricted stock or profits interests) to elect to include the value of that property in income in the year of transfer. Instead of being taxed as ordinary income when each portion vests, you prepay tax on the grant‑date value. After a valid 83(b) election, subsequent appreciation is generally taxed as capital gains when the shares are sold.

How it works (simple terms)

  • Without 83(b): Each vesting event is taxed as ordinary income based on FMV at vesting. Future appreciation after vesting is taxed as capital gains when sold.
  • With 83(b): You report and pay tax on the FMV at grant (minus any amount paid for the shares). No ordinary‑income tax at vesting; future appreciation becomes capital gain (and holding period begins at grant).

When an 83(b) election is beneficial

  • Grant‑date FMV is very low (little or no ordinary income on grant).
  • You expect the shares’ value to rise significantly.
  • You plan to remain with the company through the vesting schedule.
  • You want to start the capital gains holding period immediately.

When an 83(b) election is risky or not advisable

  • The company or shares decline in value or become worthless — tax already paid is generally not refundable.
  • You leave the company before shares vest and forfeit unvested shares — you may have paid tax on shares you never receive.
  • The grant‑date FMV already creates substantial ordinary income; prepaying may not be attractive.
  • You are uncertain about the company’s prospects or your ability to remain employed.

Filing requirements and steps

  1. Prepare the election: include taxpayer name, address, Social Security number, description of property, date transferred, FMV and amount paid, and a statement that you are making an election under IRC §83(b).
  2. Sign and date the election.
  3. File with the IRS within 30 days of the transfer. There is no extension; the deadline is strict.
  4. Provide a copy to your employer.
  5. Attach a copy to your federal income tax return for the year of the transfer.
  6. Keep a copy for your records.

Note: For stock options, the 30‑day window generally begins at exercise when the property becomes substantially vested for tax purposes.

Example (illustrative)

A founder receives 1,000,000 restricted shares at grant when FMV is $0.001/share (total $1,000), vesting over five years.
If they file an 83(b), they recognize taxable income on $1,000 at grant. If the company later grows, appreciation is taxed as capital gain when sold.
 If they do not file, they recognize ordinary income each year as shares vest based on FMV at vesting — which can be substantially larger and taxed at ordinary income rates.

Profits interests

Profits interests (common in partnerships/LLCs) give a share of future profits without current capital contribution. These awards are often accompanied by an 83(b) election to avoid later ordinary income treatment on appreciation.

Practical considerations

  • The 83(b) election is irrevocable — evaluate carefully and consult a tax advisor.
  • Keep proof of timely filing (certified mail or other proof of delivery) and copies for your tax records.
  • Confirm whether state tax rules align with federal treatment; some states have additional requirements.
  • Consider liquidity needs: paying tax up front may require cash even though you can’t sell shares immediately.

Bottom line

An 83(b) election is a powerful tax planning tool for recipients of restricted equity, especially in early‑stage companies with low grant‑date valuations and strong growth prospects. It reduces ordinary‑income tax on later appreciation and starts the capital gains clock earlier, but it carries downside risk if the shares lose value or are forfeited. Always verify the 30‑day filing deadline and consult a qualified tax advisor before electing.

Sources

  • Treasury Regulations: 26 CFR §1.83‑2 (Election to include in gross income in year of transfer)
  • IRS Topic No. 427 (Stock Options) and Topic No. 409 (Capital Gains and Losses)