Section 83(b) Election
An election filed within 30 days of receiving restricted stock to recognize ordinary income at grant rather than at vesting, locking in a low cost basis for future capital gain treatment.
Detailed Explanation
IRC Section 83(b) lets recipients of restricted stock (typical for early-stage startup founders and early employees who get stock subject to vesting, not RSUs) recognize the full fair market value as ordinary income immediately, even though the stock is unvested. The election starts the long-term capital gain holding period and the QSBS five-year clock. Failing to file within 30 days is irrevocable and forces taxation at each vesting event at potentially much higher FMV. The election is filed with the IRS and a copy attached to that year's Form 1040.
Key Points
- Must be filed with the IRS within 30 days of the grant of restricted stock. The deadline is strict and cannot be extended.
- Recognizes ordinary income on the spread at grant, often near $0 for early founders.
- Starts the long-term capital gain holding period and the QSBS 5-year clock immediately.
- Applies to restricted stock with vesting, not to RSUs (which have no §83(b) option).
- If the stock later forfeits, no deduction is allowed for the income previously recognized, the main downside.
Practical Example
A founder receives 1,000,000 shares of restricted stock at grant when the fair market value is $0.001 per share ($1,000 total) subject to 4-year vesting. Filing an 83(b) election within 30 days, she recognizes just $1,000 of ordinary income now and starts the capital gain clock. Without the election, she would be taxed on the FMV at each vesting date, potentially millions in ordinary income as the company grows.
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Learn about Tax Planning & StrategyRelated Terms
Restricted Stock Unit (RSU)
A form of employer equity compensation that delivers shares (or cash equivalent) to an employee upon vesting, taxed as ordinary income at vesting.
Qualified Small Business Stock (QSBS / Section 1202)
Stock in a qualified C corporation that, if held more than five years and meeting issuance requirements, can exclude up to $10 million or 10x basis from federal capital gains tax.
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Incentive Stock Option (ISO)
An employer-granted option to purchase company stock that, if held long enough, qualifies for preferential long-term capital gain treatment but creates Alternative Minimum Tax (AMT) on exercise.
Non-Qualified Stock Option (NQSO / NSO)
An employer-granted stock option that creates ordinary income at exercise equal to the bargain element, with employer-side payroll tax withholding.
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