Section 83(b) Election
A Section 83(b) election is a filing made with the IRS that allows a recipient of unvested property — most commonly restricted stock or profits interests in a partnership — to recognize the fair market value of that property as ordinary income immediately at the time of grant rather than waiting until the vesting date. By accelerating income recognition, the election also starts the clock on the long-term capital gains holding period from the grant date, potentially converting future appreciation from ordinary income to preferentially taxed long-term capital gain.
Under the general rule of IRC Section 83, property transferred in connection with the performance of services is includible in gross income only when it is no longer subject to a substantial risk of forfeiture — i.e., when it vests. For a recipient of restricted stock that vests over four years, the default rule would require them to recognize ordinary income equal to the stock's fair market value at each vesting date. If the stock appreciates substantially between grant and vesting, this can produce a large and unexpected ordinary income tax bill.
The Section 83(b) election allows the recipient to override this default by electing to recognize all compensation income at the grant date when the value may be much lower — potentially even zero for newly issued startup stock with a nominal par value. The election must be filed with the IRS within 30 days of the transfer of the property. This 30-day deadline is absolute; there are no extensions, and late elections are not accepted. A copy must also be attached to the taxpayer's federal income tax return for the year of transfer.
The most common use case involves founder shares or early-employee restricted stock in a startup. A founder who receives 1,000,000 shares subject to a four-year vesting schedule when the stock is worth essentially nothing can file an 83(b) election, recognize $0 (or a trivially small amount) of ordinary income on day one, and start the long-term capital gains clock immediately. When those shares vest years later at a much higher valuation, there is no additional ordinary income event. When the founder eventually sells, the entire gain from the grant-date basis is taxed at long-term capital gains rates, provided the shares were held for more than one year from the grant date.
The risk of an 83(b) election is that if the property later forfeits — because the employee leaves before vesting — the taxpayer does not receive a refund of taxes paid on the income recognized at grant. The taxpayer simply loses the forfeited shares without any offsetting deduction for the ordinary income already reported. Additionally, if the stock declines in value, the taxpayer will have overpaid taxes relative to the amount of wealth ultimately received.
For stock options, the 83(b) election has limited application; it is more commonly discussed in the context of early exercise of incentive stock options (ISOs) or non-qualified stock options (NSOs) before vesting, where special rules apply. Tax advisors routinely recommend that startup founders complete 83(b) elections promptly upon receiving restricted stock grants, as the cost at formation is typically negligible and the long-term tax benefit can be substantial if the company grows in value.