83(b) Election
An 83(b) election is a filing under IRC §83(b) by which a recipient of restricted stock (or early-exercised stock options) elects to recognize taxable income at the time of grant rather than at vesting. The election locks the tax basis at the grant-date fair market value and starts the long-term capital-gain holding-period clock from grant.
The default §83 rule is that restricted stock (subject to vesting) is taxed as ordinary income at the FMV at vesting. For early-stage startup equity where the grant FMV is low (e.g., $0.001 per share) but expected vesting-date FMV is high (e.g., $5 per share at Series A), the default treatment is punitive — ordinary-income tax on the entire spread, year by year as vesting occurs. The 83(b) election lets the employee instead pay tax once at grant on the negligible grant FMV, then realize all subsequent appreciation as long-term capital gain when the shares are eventually sold.
The election must be filed with the IRS within 30 days of the grant date — no extensions, no exceptions. Filing requires a specific form (no IRS-provided template; most practitioners use a published model letter), a copy to the employer, and a copy to the employee's personal records. The employee should retain a USPS certified-mail receipt as proof of timely filing; lost or untimely 83(b) elections have caused real disasters when the IRS rejects them years later.
The election is irrevocable. If the stock value drops or the employee leaves before vesting, the tax paid at grant is not refundable. The election is best when (a) grant FMV is very low, (b) substantial appreciation is expected by vesting, and (c) the employee is reasonably likely to vest. For very-early-stage founders or seed-stage employees with large equity grants and minimal grant FMV, the cost of the election is often $0–$100 in tax; the upside is converting potentially millions of ordinary income into long-term capital gains. For mid-stage employees joining at higher FMVs, the election arithmetic gets complex and may not be advisable.
Synthetic households with early-stage startup equity should track 83(b) election status per grant. Founder and seed-employee profiles should have the election filed (locked basis at grant FMV); later-stage employees typically do not. The election filing creates a paper trail (IRS receipt, employer copy) that audit-grade test data should reflect. Edge cases: 83(b)-elected stock that fails to vest (employee leaves) — the tax paid is irrevocable but no offsetting deduction available.
Common pitfalls
- Missing the 30-day deadline — the IRS does not grant extensions; late 83(b) filings are simply rejected.
- Treating 83(b) as auto-applied on any restricted-stock grant — it requires explicit election, not default behavior.
- Filing 83(b) on grants with already-high FMV — the upfront tax can dwarf the expected benefit.
- Forgetting to provide a copy to the employer — the employer's copy enables proper W-2 reporting; missing it complicates payroll later.
Examples
Founder receives 1,000,000 shares of restricted common stock at incorporation, FMV $0.0001/share ($100 total). Subject to 4-year vesting. Files 83(b) within 30 days, recognizing $100 of ordinary income in year 1. Three years later at Series A: company valued at $5/share, founder's vested portion = 750,000 shares × $5 = $3.75M. Without 83(b): ordinary income on all $3.75M of vested-portion appreciation. With 83(b): $3.75M is unrealized capital gain, taxable only on sale, at long-term rates if held >1 year from grant.