An 83(b) election is an IRS provision allowing taxpayers to pay taxes on the total fair market value of restricted property at the time it's granted, rather than when it vests.
The 83(b) election is a provision under the Internal Revenue Code that allows recipients of restricted stock or other property to accelerate income tax recognition to the time the property is granted, rather than when it becomes vested. When making this election, the taxpayer pays ordinary income tax based on the fair market value of the property at the time of grant, even though the property may not be fully vested for years. By doing so, any future appreciation in the asset is treated as a capital gain instead of ordinary income, which can result in favorable tax treatment. The election must be filed with the IRS within 30 days of the grant date and is irrevocable. It is most commonly used by startup founders, key employees, and investors who receive stock subject to vesting schedules. However, if the property forfeits before it becomes vested, the taxpayer loses the upfront tax payment, as there is no refund allowed. Therefore, making an 83(b) election involves careful tax planning and risk tolerance. In finance and wealth management, the 83(b) election is a crucial strategy for timing taxation on equity compensation and private transactions, particularly in companies with highly anticipated future growth.
Effective use of the 83(b) election can significantly improve after-tax outcomes for families engaged in early-stage venture capital, private equity, or direct investments. When family offices are involved in structuring employee or founder compensation or gifting restricted stock among family members or to trusts, understanding and utilizing the 83(b) election can optimize tax positioning over time. Additionally, for estate planning and trust structuring purposes, making the election early (particularly before significant appreciation) can reduce future taxable events and help ensure long-term compliance. Advisors guiding generational wealth transfers or equity-based compensation planning must be fluent in its implications.
A startup founder receives 1 million shares of restricted stock at a $0.01/share fair market value (FMV), with a 4-year vesting schedule. By filing an 83(b) election, they pay ordinary income tax on $10,000 upfront (1,000,000 × $0.01). If the company grows and the stock appreciates to $10/share when fully vested, they avoid paying ordinary income tax on $10 million (which would otherwise apply) and instead will pay the lower capital gains tax on the appreciation when the stock is sold.
Vesting
Vesting refers to the process by which an individual gains full ownership of an asset or benefit over time, such as stock or retirement contributions. While 83(b) elections allow early tax recognition, vesting determines when the asset is legally owned without restriction and directly affects the tax consequences without such an election.
What happens if I don't file an 83(b) election?
If you don't file an 83(b) election, you'll recognize ordinary income as your restricted shares vest, based on their fair market value at the time of vesting, which could be significantly higher than at grant. This can lead to a much higher tax bill.
Can I revoke or amend an 83(b) election?
No, once an 83(b) election is filed, it is irrevocable. There's no way to cancel or change it after the 30-day filing window has passed, even if the stock is later forfeited.
What are the risks of making an 83(b) election?
The primary risk is that if the stock is forfeited—say, you leave the company before it vests—you cannot reclaim the taxes already paid. Additionally, if the stock never appreciates, you may have needlessly paid taxes upfront.
