When a founder or employee receives stock subject to a vesting schedule, they typically receive "property" under IRC §83 that is subject to a substantial risk of forfeiture. Without a §83(b) election, income is recognized each time a tranche of stock vests - at the FMV on each vesting date. If the company has grown significantly, each vest creates a large ordinary income event. The §83(b) election changes this entirely: by filing within 30 days of grant, the founder recognizes income immediately based on the current (usually low or zero) value of the stock. All subsequent appreciation is capital gain rather than ordinary income. The election is one of the most consequential tax decisions a founder can make - and the 30-day deadline is absolute.
Without the election: Restricted stock vests in tranches over 4 years. Each vest is a taxable event - ordinary income equal to FMV on the vesting date minus the amount paid. If the company's value rises from $1M to $50M during the vesting period, later vests create massive ordinary income taxed at rates up to 37%.
With the election: Income is recognized at grant, when the stock is typically worth very little (sometimes zero "spread" for founders who pay FMV). All subsequent appreciation - from grant date to sale - is capital gain. If held more than one year, it is long-term capital gain taxed at 0-20%. Combined with §1202 QSBS exclusion (if the company qualifies), the entire gain may be tax-free.
The 30-day deadline: The election must be filed with the IRS within 30 days of the date the stock was transferred. There is no exception, no extension, and no late filing procedure. A §83(b) election filed on day 31 is invalid. The deadline is one of the few truly hard deadlines in the tax code.
The §83(b) election is almost always beneficial when: the stock has little or no current value (early-stage startup, nominal FMV), the company is expected to grow significantly, and the taxpayer can afford the modest current tax on the low current value. For a founder who receives 1,000,000 shares at $0.0001 par value when the company has no meaningful FMV, the §83(b) election may result in zero income recognized currently (if FMV equals the purchase price). Any future appreciation - even to $10M - would then be entirely long-term capital gain (if held more than one year).
The election is not always beneficial. Do not make the §83(b) election when: the stock has significant current value and the ordinary income recognized would be large; there is genuine risk of forfeiture and the company may not succeed (you pay tax now and get nothing back if the stock is forfeited - the only recovery is a capital loss); or the stock comes with substantial restrictions that make current FMV genuinely low but the business model is uncertain.
If the stock is forfeited after a §83(b) election, no deduction is allowed for the income previously recognized. The taxpayer gets only a capital loss for the amount paid for the stock - not for the ordinary income previously recognized. This asymmetry means a §83(b) election on stock with genuine forfeiture risk can result in paying ordinary income tax with only a capital loss deduction on forfeiture.
The §83(b) election is made by filing a statement with the IRS Service Center where the taxpayer files their tax return. The election must include: the taxpayer's name, address, and SSN; description of the property; date of transfer and taxable year; nature of restriction; FMV at transfer; amount paid; and a statement that copies have been provided to the company. The taxpayer should send the election by certified mail with return receipt and keep a copy. Under Rev. Proc. 2012-29, a copy must also be provided to the employer within 30 days. A copy is attached to the taxpayer's tax return for the year of the transfer.