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What is an 83(b) election, and why should I file one?

83(b)TaxEquityVesting

Restricted stock, meaning stock that vests, is by default taxed as it vests: each time a tranche vests, its value on that day, less what you paid, is ordinary income. A Section 83(b) election is a short filing with the IRS, within 30 days of receiving the stock, that says you would rather be taxed on all of it now, at its value today. For a founder who bought shares at par value on the day of formation, today's value and the price paid are the same number, so the income is zero, the tax is zero, and every dollar of later growth is capital gain instead of salary. Without the election the same founder pays ordinary income tax, in cash, on each vesting date, on shares they cannot sell.

The two examples

A founder receives 100,000 shares that vest over four years, worth one cent each today, one dollar each when they vest, and five dollars each when sold more than a year later. With the election, they report $1,000 of income now and pay a few hundred dollars of tax, then pay capital gains tax on the rest at sale. Without it they report $100,000 of ordinary income as the shares vest, owe tens of thousands of dollars of tax in years when they may have no cash, and only then start the capital gains clock. At the top federal rates, 37 percent on ordinary income and 20 percent on long-term gains, the difference in the example is over $16,000, and it grows with the company.

What else it does

It starts the holding period for long-term capital gains on the grant date rather than on each vesting date, and it starts the holding period for the QSBS exclusion the same way. It removes the cash-flow problem of owing tax on illiquid stock. And it means the company has no withholding obligation on vesting dates, which matters to a company with no payroll yet.

When not to file

If the stock is worth much more than you are paying for it on the day you receive it, the election taxes that difference now, and if you then leave before vesting or the company fails, the tax is not refunded. That is the case for a late-joining executive receiving valuable restricted stock, and it is a conversation with a tax advisor. It is not the case for founder stock at par. The election applies only to stock that vests; fully vested stock is taxed at grant anyway, and options are taxed under different rules unless exercised early.

The 30 days run from the date the shares are transferred to you, which is the issuance date on your stock purchase agreement, not the date you mail the form. When two dates could apply, count from the earlier one. The election cannot be filed late and cannot be corrected after the deadline. How to file it, by mail or online, and how to prove the IRS received it are in our filing articles.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.