83(b) Election

An 83(b) election, filed with the IRS within 30 days of receiving restricted stock, lets the recipient recognize and pay tax on the stock's value at the time of grant rather than as each tranche vests over time. Filed early — ideally right at incorporation when the stock's fair market value is essentially zero — this can mean owing little to no tax now in exchange for avoiding a much larger tax bill later as the stock's value (and each vesting tranche's taxable value) rises.

Without an 83(b) election, restricted stock is taxed as ordinary income on the fair market value of each tranche as it vests, which can create a real and unwelcome tax bill for founders or early employees if the company's valuation rises significantly between grant and vesting — potentially with no liquidity to actually pay that tax.

The election is a short written statement, but the mechanics are precise. Under the Treasury regulations, it's made by filing the statement with the IRS office where the taxpayer files their return, and the taxpayer must also give a copy to the company. The statement has to be signed, say it's being made under Section 83(b), and include specific information such as the taxpayer's name, address, and taxpayer identification number and a description of the property.

It applies to property actually transferred subject to vesting — restricted stock, and stock acquired by exercising options early before they vest. It doesn't apply to RSUs, which are only a promise of future shares, or to options that haven't been exercised.

The statute says the election must be made no later than 30 days after the transfer and can't be revoked without the IRS's consent. Use a delivery method that gives you proof of timely filing, and keep the proof with your records — the cost of a missed deadline surfaces years later.