Section 83(b) Election: Tax Guide for Founders

If you receive restricted stock from a startup or employer, a Section 83(b) election can be one of the most powerful tax moves available. File within 30 days of receiving the shares, and future appreciation is taxed at capital gain rates. Miss the deadline, and the full spread at vesting hits you as ordinary income.

What Is the Section 83(b) Election?

IRC Section 83 governs the taxation of property transferred in connection with the performance of services. Under the default rule, you pay ordinary income tax on the fair market value of shares at each vesting date, not when you receive them.

An 83(b) election reverses that default. By filing within 30 days of the transfer, you choose to be taxed immediately on the current fair market value. If the stock is worth little at grant (common for founders receiving shares in a newly formed company), the income recognized at election time is near zero.

From that point forward, any appreciation is a capital gain. Hold the shares for more than one year after the grant date and the gain qualifies for long-term capital gains rates, which currently max out at 20% for high earners (plus the 3.8% net investment income tax if applicable).

Who Should File an 83(b) Election?

The election is most powerful when both of these conditions are true:

• The stock is worth very little at grant, so the immediate tax cost is minimal
• The stock is expected to appreciate significantly before vesting is complete

Founders receiving shares at company formation, early employees receiving restricted stock at below-market prices, and advisors receiving equity grants are all strong candidates.

The election is less attractive when the stock already carries significant value at grant (you would owe substantial tax now) or when the risk of forfeiture is high (you might leave before vesting and pay unrecoverable tax).

What the 83(b) Election Does Not Cover

The election only applies when actual shares are transferred subject to a substantial risk of forfeiture. It does not apply to:

• Restricted stock units (RSUs): No shares are transferred at grant. The taxable event occurs at vesting. RSU holders have no 83(b) election available. See the RSU vs. ISO vs. ESPP tax comparison for how these equity types differ.
• Unexercised stock options: Holding an option is not a property transfer. The election only becomes relevant after you exercise and receive actual shares.
• Early-exercised ISOs and NQSOs: If you early-exercise an option before the shares vest, actual shares are transferred and the 83(b) election applies. For incentive stock options (ISOs), the election also affects the alternative minimum tax (AMT) calculation by eliminating the spread that would otherwise be an AMT preference item at vesting.

The Tax Math: A Concrete Example

Suppose you are a co-founder who receives 1,000,000 shares at $0.001 per share (total value: $1,000) on a four-year vesting schedule. By the time vesting is complete, the shares are worth $5 per share ($5,000,000 total).

Without an 83(b) election: You recognize ordinary income at each vesting date as shares unlock. At a 37% federal rate, vesting $5,000,000 of stock generates roughly $1,850,000 in federal income tax, and you must pay this before you can sell a single share in a private company.

With an 83(b) election: You recognize $1,000 of ordinary income at grant (tax: about $370). The $4,999,000 of appreciation is treated as long-term capital gain taxed at 20%, generating approximately $999,800 in tax. Total: roughly $1,000,170 instead of $1,850,000.

The election saves more than $800,000 in this example. The savings scale with the company's eventual value.

How to File the 83(b) Election

The IRS introduced Form 15620 in November 2024 to standardize the process. Before this form, taxpayers submitted a model letter. Either method remains acceptable, but Form 15620 reduces the risk of omitting required information.

Steps to file:

1. Complete IRS Form 15620 within 30 days of the stock transfer date.
2. File it with the IRS service center where you file your individual return. As of June 2025, the IRS accepts electronic filing for certain 83(b) elections.
3. Retain a copy for your personal records.
4. Attach a copy to your federal tax return for the year of the election.
5. Check whether the company requires a copy for its own records.

The 30-day deadline is absolute. The IRS has no procedure to accept late elections, and courts have consistently rejected requests for equitable exceptions. Missing the window means you cannot file.

Key Risks Before You Elect

The 83(b) election is not the right move in every situation:

• Forfeiture: If you leave before vesting and forfeit shares, you cannot deduct or recover the tax paid at grant. The loss is permanent.
• Value decline: If the stock is worth less at vesting than at grant, you overpaid taxes. The election locks in ordinary income based on grant-date value with no refund if the stock falls.
• Cash to pay the tax: You pay tax on income you may not be able to convert to cash yet. Private company employees may owe real dollars in taxes long before any liquidity event.

For most early-stage founders with near-zero grant-date values, these risks are manageable. The calculus changes if the stock already carries meaningful value at the time of transfer.

Have questions about whether an 83(b) election makes sense for your equity situation? Contact TS CPA for a free consultation. We respond within the same day.