Section 83(b) Election

A Section 83(b) election is a federal tax election under Section 83(b) of the Internal Revenue Code allowing a recipient of restricted property, typically founder stock or employee equity subject to vesting, to recognize income at the time of grant rather than waiting until the property vests. The election fixes the taxable amount at the grant-date fair market value, starts the capital gains holding period, and converts what would otherwise be ordinary income at vesting into capital gain on later sale. The election must be filed with the IRS within 30 days of receipt, a deadline that has no extensions.

Why the election matters

Without an 83(b) election, the recipient of restricted property recognizes ordinary income on each vesting date equal to the property's fair market value at vesting (less any amount paid). For founders whose stock is subject to a 4-year vesting schedule, this means recognizing ordinary income, at the highest rate, on each vesting tranche, calculated against the (presumably) growing value of the company. With an 83(b) election, the entire grant-date value is recognized once at grant, when the value is typically minimal, and all future appreciation is taxed as capital gain on sale.

The 30-day deadline

The election must be filed with the IRS within 30 days of the property transfer (the date of stock grant or unvested equity issuance). The deadline is strict, there is no extension, no relief for late filing, and no equitable doctrine that excuses missing it. The election is filed by mailing a written statement (Rev. Proc. 2012-29 provides a sample) to the IRS office where the recipient files their tax return, with copy retained for the recipient's tax return for the year of transfer. As of 2023, electronic filing of 83(b) elections is also accepted.

Required election content

The 83(b) election must include: (1) name, address, and taxpayer identification number of the taxpayer; (2) description of the property (e.g., 1,000,000 shares of Common Stock); (3) date of transfer and tax year for which the election applies; (4) nature of restrictions on the property; (5) fair market value at transfer (without regard to lapse restrictions); (6) amount paid for the property; (7) amount included in gross income; and (8) statement that copies have been furnished to the entity.

Risk of forfeiture

If the recipient pays tax on the grant-date value via 83(b) election but later forfeits the unvested shares (e.g., by leaving the company before vesting), no deduction or refund is available for the previously-paid tax. This is the principal risk of the election. For founders highly likely to remain through vesting and where grant-date value is low (often nominal), the risk is small relative to the upside. For employees with material grant-date value or uncertain commitment, the analysis is more nuanced.

When the election is most valuable

83(b) elections are essentially mandatory for founders receiving stock in a newly-formed C-corporation, where the per-share value is typically nominal ($0.0001 or similar) and the entire grant value is well below any tax threshold. The election preserves capital-gains treatment on the entire equity stake, frequently worth millions in tax savings on a successful exit. For employees receiving stock at fair market value, the election analysis depends on growth expectations, vesting risk, and the recipient's individual tax situation.