The Section 83b election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting. Restricted stock include include stocks that are subject to a vesting period that may last several years, on the condition that the employee will continue working at the company for a number of years or until a particular company milestone is met.
Section 83b election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting. Making a Section 83b election is based on the premise that the equity will be of a higher valuation at a future date and allows holders to that pre-pay tax liability on a low valuation. The fair market value of the equity at the time of the granting or transfer is the basis for the assessment of tax liability.
How to make a Section 83b Election
IRS Revenue Procedure 2012-29 contains sample language that may be used (but is not required to be used) for making an election under § 83(b) of the Internal Revenue Code. The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.
The 83(b) election gives a founder the option to pay taxes on the equity upfront before the vesting period starts. The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income.This is often $0 with respect to newly registered startups. The share value during the vesting period will not matter as the founder won't pay any additional tax when the share vests. However, it is important to note that if the shares are sold for a profit, a capital gains tax will be applied.
The following examples illustrate the tax results that may occur depending on whether or not a Section 83b election is made following the transfer of substantially nonvested stock in connection with the performance of services.
Sidebrief Illustration
Sidebrief is a privately held corporation On April 1, 2022, in connection with the performance of services, Sidebrief transfers to Eunice, one of it's co-founders, 25,000 shares of substantially nonvested stock in Sidebrief. In exchange for the stock, E pays Sidebrief $25,000, representing the fair market value of the shares at the time of the transfer. The restricted stock agreement provides that if E ceases to provide services to Sidebrief as an employee prior to April 1, 2024, E will lose ownership of the stock. E's ownership of the 25,000 shares of stock will not be treated as substantially vested until April 1, 2024 and will only be treated as substantially vested if E continues to provide services to Sidebrief as an employee until April 1, 2024.
On April 15, 2022, E makes a valid election under § 83(b) with respect to the 25,000 shares of Sidebrief's stock. Because the excess of the fair market value of the property ($25,000) over the amount E paid for the property ($25,000) is $0, E includes $0 in gross income for 2022 as a result of the stock transfer and related § 83(b) election. The 25,000 shares of stock become substantially vested on April 1, 2024 when the fair market value of the shares is $40,000. No compensation is includible in E's gross income when the shares become substantially vested on April 1, 2024. In 2025, E sells the stock for $60,000. As a result of the sale, E realizes $35,000 ($60,000 sale price – $25,000 basis) of gain, which is a capital gain. Capital gain is taxed as a preferential rate of a maximum of 20% as opposed to the inclusion as ordinary income.
In the alternative, if E does not make an election under § 83(b). Under § 83(a), E includes $0 in gross income in 2022 as a result of the transfer of stock from Sidebrief because the stock is not substantially vested. When the shares become substantially vested on April 1, 2024, E includes $15,000 ($40,000 fair market value less $25,000 purchase price) of compensation in gross income. E's basis in the stock as of April 1, 2024 is $40,000. $25,000 paid for the stock and $15,000 included in income under § 83a. As a result of the 2025 sale of the stock for $60,000, E realizes $20,000 ($60,000 sale price – $40,000 basis) of gain, which is a capital gain
Sample Section 83(b) Election
15th April 2022 Eunice E. Eleganza Apartments, Ikate Elegushi Lagos, Nigeria. Via Certified Mail Department of Treasury Internal Revenue Service Austin, TX United States Dear Sir/Ma SECTION 83 B ELECTION The undersigned taxpayer hereby elects, pursuant to § 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income as compensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares. 1. The name, taxpayer identification number, address of the undersigned, and the taxable year for which this election is being made are: TAXPAYER'S NAME: _____________________________________________ TAXPAYER'S SOCIAL SECURITY NUMBER: __________________________ ADDRESS: ______________________________________________________ TAXABLE YEAR: Calendar Year 20__ 2. The property which is the subject of this election is __________ shares of common stock of __________________________. 3. The property was transferred to the undersigned on[DATE] 4. The property is subject to the following restrictions:[Describe applicable restrictions here]. 5. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a nonlapse restriction as defined in § 1.83- 3(h) of the Income Tax Regulations) is: $_______ per share x ________ shares = $___________ 6. For the property transferred, the undersigned paid $______ per share x _________ shares = $______________. 7. The amount to include in gross income is $______________.[The result of the amount reported in Item 5 minus the amount reported in Item 6.] The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his or her income tax return for the taxable year in which the property is transferred. The undersigned is the person performing the services in connection with which the property was transferred. _______________________ Signed & Dated
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
