§83(b) Election: 30-Day Window to Convert Stock Gain to Capital Gain

30-Day Hard Deadline • File With IRS • Locks in Low FMV • Capital Gain on All Future Appreciation • Forfeiture Risk
IRC §83(b)Treas. Reg. §1.83-2Rev. Proc. 2012-29
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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.

§83(b) Election: The Core Mechanics

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), gain up to the §1202 per-issuer cap 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 extension and no late filing procedure (the relief is limited to the weekend and legal holiday rule of IRC §7503, under which an election postmarked the next business day is timely if the thirtieth day falls on a Saturday, Sunday or legal holiday, and to postponements for combat zone service or federally declared disasters under IRC §7508 or §7508A, which Rev. Proc. 2018-58 section 8 lists as covering §83(b) elections). A §83(b) election filed on day 31 is invalid. The deadline is one of the few truly hard deadlines in the tax code.

When the Election Makes Sense

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).

§83(b) election + §1202 QSBS holding period: the ultimate founder stack. Making the §83(b) election starts the §1202 QSBS holding period (for stock acquired after July 4, 2025: 3 years for a 50% exclusion, 4 years for 75%, and 5 years for 100%; for stock acquired on or before that date: more than 5 years) on the date of transfer rather than on each vesting date. Without the election, each vesting tranche starts its own QSBS clock. A founder who makes the §83(b) election has all shares on a single holding period running from the date of transfer - potentially sheltering gain from federal income tax up to the §1202(b) per-issuer cap (the greater of $15,000,000 or 10 times basis for stock acquired after July 4, 2025; the greater of $10,000,000 or 10 times basis for earlier stock).

When the Election Does NOT Make Sense

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.

How to File the Election

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 Treas. Reg. §1.83-2(d), a copy must also be provided to the person for whom the services are performed (the employer). For property transferred on or after January 1, 2016, a copy of the election is no longer attached to the taxpayer's tax return (Treas. Reg. §1.83-2(c) and (g)). The IRS also provides Form 15620 for making the election.

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Authority: IRC §83(a) (property transferred in connection with performance of services - included in gross income in first taxable year in which not subject to substantial risk of forfeiture and transferable; FMV at vesting minus amount paid); IRC §83(b) (election to include in gross income in year of transfer - must be filed within 30 days of transfer; income equals FMV at transfer minus amount paid; no additional income on vesting; no deduction if property forfeited after election); IRC §83(c) (substantial risk of forfeiture - rights subject to forfeiture if required services not performed or conditions not met; vesting conditions constitute substantial risk); Treas. Reg. §1.83-2 (§83(b) election mechanics - requirements; statement to be filed with IRS and provided to employer; 30-day deadline is absolute; no extensions; no copy attached to the return for property transferred on or after January 1, 2016 under §1.83-2(c) and (g)); Rev. Proc. 2012-29 (sample §83(b) election language satisfying §1.83-2(e)); Form 15620 and its instructions; Treas. Reg. §1.83-4(a) (holding period of §83 property begins just after the property is substantially vested, or just after the date of transfer if a §83(b) election is made - so with the election all shares share a single holding period for §1202 purposes); IRC §1202(b)(4) (applicable dollar limit on excludable gain).