How Does a Section 83(b) Election Work?
Learn how a Section 83(b) election lets you choose to be taxed on compensatory equity at its grant date value, rather than its value when it vests.
Section 83(b) of the Internal Revenue Code (IRC) offers a choice for individuals who receive property, like restricted stock, as compensation for their services. Making this election can alter the timing and amount of tax owed on that compensation.
Understanding the Section 83(b) Election
When an individual receives property subject to vesting conditions, like restricted stock, the default tax treatment falls under Section 83(a). Under this rule, the property’s value is not included in taxable income until it vests. At vesting, the property’s fair market value becomes taxable as ordinary income.
A Section 83(b) election allows a person to include the property’s fair market value in their income when it is granted, rather than waiting for it to vest. This decision accelerates the tax event to the grant date and is beneficial if the property’s value is expected to increase substantially.
Consider an employee granted 1,000 shares of restricted stock when the fair market value is $1 per share. If the employee does not make an 83(b) election, and the stock vests three years later when the value is $10 per share, the employee will have $10,000 of ordinary income at the vesting date. If the employee makes a timely 83(b) election, they will instead recognize $1,000 of ordinary income in the year the stock was granted.
Making the election also starts the holding period for capital gains tax purposes from the grant date. When the stock is eventually sold, any appreciation from the grant date value will be treated as a capital gain. Without the election, the holding period begins on the vesting date.
Information and Decisions for the Election
Preparing to make a Section 83(b) election requires gathering specific information for a statement filed with the IRS. While the IRS released an optional Form 15620 in late 2024, the election can also be made through a formal letter. The statement must provide a clear description of the property, such as the number of shares and the class of stock.
The document must also include your name, address, and taxpayer identification number. The date the property was transferred and the tax year for which the election is being made are also necessary. You must also specify the amount, if any, that you paid for the property.
A key piece of information is the fair market value of the property at the time of the transfer. For a publicly traded company, this is determined by the stock’s market price on the grant date. For a private startup, determining fair market value can be more complex and often relies on a recent 409A valuation. The decision to file hinges on an assessment of the stock’s potential for appreciation versus the risk of forfeiture if vesting conditions are not met.
The Filing Process
The procedure for filing a Section 83(b) election is time-sensitive. The election must be filed with the IRS within 30 days of the property’s grant date. This 30-day window is absolute, and the IRS does not grant extensions. Missing this deadline means the opportunity is permanently lost.
The signed election statement should be mailed to the appropriate IRS service center. Using certified mail with a return receipt is recommended, as it provides proof of a timely filing, for which the taxpayer is responsible.
After mailing the statement to the IRS, you must provide a copy to your employer. This allows the company to correctly handle payroll withholding for the income recognized. The employer will then include the value of the stock as compensation on your Form W-2 for that year.