What Is an 83/13 Election? The 83(b) Election Explained

The term “83(b) election” refers to a provision in the U.S. Internal Revenue Code for taxpayers who receive property, like restricted stock, as compensation for services. By default, this compensation is taxed when the property fully vests. An 83(b) election allows you to choose to pay tax on the property’s value at the time it is granted, rather than when it vests.

What is an 83(b) Election

Under the Internal Revenue Code’s default rule, Section 83(a), when you receive property for services that is subject to vesting, you are taxed on its value when the restrictions lapse. For startup founders and employees, this property is almost always restricted stock. These shares are not owned outright but are earned over time through a vesting schedule.

A vesting schedule creates what the tax code calls a “substantial risk of forfeiture.” A common schedule spans four years with a one-year “cliff,” requiring one year of service to receive the first 25% of shares. If you leave before the cliff, you forfeit all shares.

The value of the property is its Fair Market Value (FMV) on a given date. For a private, early-stage company, the stock’s FMV at the time of grant can be very low, sometimes fractions of a cent per share. This is often established through a formal 409A valuation.

An 83(b) election overrides the default rule. By making the election, you choose to be taxed on the total FMV of the entire grant in the year it is awarded, even while the shares are still subject to forfeiture. The decision is irrevocable once made.

Tax Consequences With and Without the Election

Without an 83(b) election, you pay ordinary income tax as your shares vest. The taxable amount is the Fair Market Value (FMV) on each vesting date, minus any amount you paid for the shares. The holding period for capital gains also begins on each separate vesting date.

Making a timely 83(b) election accelerates the tax event to the grant date. The entire FMV of all granted shares is recognized as ordinary income in that single tax year. Since the FMV of an early-stage startup’s stock is often low, the initial tax liability can be minimal.

With the election, the capital gains holding period for all shares begins on the grant date. All subsequent appreciation is treated as a capital gain. If the shares are held for more than one year after the grant date, the gain qualifies for more favorable long-term capital gains tax rates.

For example, an employee is granted 100,000 shares at a grant-date FMV of $0.10 per share. If the stock value rises to $5.00 on the first vesting date for 25,000 shares, the employee recognizes $125,000 of ordinary income without an election. With an 83(b) election, the employee recognizes only $10,000 of ordinary income in the grant year, and all future appreciation is treated as a capital gain.

Required Information for Your Election Statement

To make a valid 83(b) election, you must prepare a formal statement containing specific information required by Treasury Regulations. While you can draft this as a letter, the IRS also provides an optional form for this purpose.

Your election statement must include the following details:

• Your full name, current address, and Taxpayer Identification Number (TIN).
• A clear description of the property (e.g., “10,000 shares of Common Stock of XYZ, Inc.”).
• The date the property was transferred (the grant date) and the taxable year for the election.
• The nature of any restrictions on the property, such as the vesting schedule.
• The Fair Market Value of the property at the time of transfer.
• The amount, if any, that you paid for the property.
• A declaration that a copy of the election has been furnished to your employer.

The 30-Day Filing Process

The process for filing an 83(b) election is governed by a strict deadline. The completed and signed election statement must be filed with the IRS within 30 calendar days of the property’s grant date. This 30-day window is absolute, and the IRS does not grant extensions.

You must mail the original, signed statement to the IRS service center where you file your annual tax return. It is highly recommended to use USPS Certified Mail with a return receipt requested. This provides postmarked proof of mailing, as the burden of proving a timely filing rests on the taxpayer.

You are also required to provide a copy of the election statement to your employer. This step ensures the company is aware of your tax election for its payroll and withholding tax reporting.

Retain a copy of the signed election statement, the certified mail receipt, and the return receipt card for your permanent tax records. A copy of the election statement is no longer required to be filed with your annual income tax return.