Founders usually receive their shares at formation, subject to vesting. Without an 83(b) election, every time a tranche vests, the founder recognizes ordinary income equal to the value of the shares that vested. With the election, the founder is taxed once, at grant, on the value then, which for a newly formed company is usually close to nothing.
How it works
Section 83 taxes property received for services when it is no longer subject to a substantial risk of forfeiture, meaning when it vests. Section 83(b) lets the recipient elect to include the value in income at transfer instead.
Income at transfer = fair market value of the shares − amount paid.
When founders buy their shares at fair market value, the income is zero.
A worked example
At formation, a founder buys 4,000,000 shares at $0.0001 per share, paying $400, with four-year vesting.
| With 83(b) | Without 83(b) | |
|---|---|---|
| Income at purchase | $0 (paid fair value) | None at purchase |
| Year 2: 1,000,000 shares vest, value now $0.50 per share | Nothing | $500,000 ordinary income |
| Year 3: 1,000,000 vest at $1.50 | Nothing | $1,500,000 ordinary income |
| Capital gain holding period starts | At purchase | At each vesting date |
Without the election, the founder owes tax on income that was never received in cash, with no market to sell shares to pay it.
The deadline and how to file
- The election must be made no later than 30 days after the transfer date. There is no extension.
- The IRS released Form 15620 in late 2024 for making the election. Using it is optional; a written statement with the information required by the regulations is still acceptable.
- Send it to the IRS office where the taxpayer files, by a method that proves the date sent (certified mail with a postmarked receipt is common), and check the current form page for any electronic filing option.
- Give a copy to the company.
- A copy no longer has to be attached to the individual's income tax return.
Why it matters beyond the tax bill
- QSBS: the Section 1202 holding period for stock generally starts when the stock is acquired; for restricted stock, an 83(b) election helps establish that start.
- Diligence: investors and acquirers ask for copies of every founder and early-employee 83(b) election. Missing ones become a disclosure item.
- Early exercise: employees who early exercise options into unvested stock use the same election.
Risks to understand
If the shares are forfeited before vesting (the founder leaves early), the election cannot be undone and the loss is generally limited to the amount paid. For shares bought at a nominal price, that risk is small.
What to keep
- A signed copy of each election
- Proof of the mailing date
- The stock purchase agreement and evidence of payment
- The board consent approving the issuance
We track the 30-day window for every restricted stock issuance, prepare the election with the founder's tax adviser, and keep the evidence ready for the data room.
Sources
- 26 U.S.C. §83, Property transferred in connection with performance of services (Cornell LII)
- IRS, Form 15620, Section 83(b) Election (PDF)
- 26 U.S.C. §1202, Partial exclusion for gain from certain small business stock (Cornell LII)
Questions founders ask
What if the 30-day deadline is missed?
The election generally cannot be made late. Each vesting date then becomes a taxable event at the stock's value on that date, which can be significant if the company's value has grown.
Does an 83(b) election apply to stock options?
Not to ordinary options, which are not property until exercised. It can apply when options are early exercised into restricted stock that is still subject to vesting.
