Section 83(b) Election
- Viktoriya Barsukova, EA, MBA
- 12 hours ago
- 5 min read
By Angelo Liberati, BBA, CPA, MST
As amended, §83(b) of the Internal Revenue Code of 1986 provides a valuable tax election for individuals who receive restricted stock or other equity compensation, such as restricted stock or nonqualified stock options (NSOs) upon vesting. This choice considers the value of the equity received versus its value when recognized after vesting. To qualify, the equity compensation must have a “substantial risk of forfeiture.”
By making an election under this provision, the taxpayer can choose to recognize income based on the stock’s fair market value (FMV) at the time it is granted rather than when it vests, which can often be years later. Without the election, restricted stock is generally taxed as ordinary income when it becomes substantially vested, while nonqualified stock options (NSOs) are taxed at exercise. Incentive stock options (ISOs) follow different rules but may be impacted for alternative minimum tax (AMT) purposes.
Understanding the mechanics of §83(b) as it applies to each form of equity compensation is essential to advising clients effectively. The rules differ for restricted stock, NSOs and ISOs, and the timing of the election, along with its potential benefits and risks, must be carefully weighed. The following sections outline how the §83(b) election impacts each type of equity award.
Restricted Stock
Section 83(b) Election
General rule without §83(b) election
When an employee receives restricted stock (i.e., stock subject to a substantial risk of forfeiture and/or nontransferability), the employee is not taxed at the time of receipt. Instead, taxation occurs when the stock becomes substantially vested (i.e., when it is either transferable or no longer subject to a substantial risk of forfeiture). At that time, the employee recognizes ordinary income equal to the fair market value (FMV) of the stock at vesting, less any amount paid for the stock.
Effect of §83(b) election
By making a §83(b) election within 30 days of the transfer, the employee elects to include in gross income the excess of the FMV of the stock at the time of transfer (ignoring any restrictions other than those that will never lapse) over the amount paid for the stock, even though the stock is not yet vested.
Any subsequent appreciation in the value of the stock is not taxed as compensation; instead, it is taxed as capital gain (short- or long-term, depending on the holding period) when the stock is sold. The holding period for capital gains purposes begins at the time of transfer if the §83(b) election is made.
Nonqualified Stock Options (NSOs)
Section 83(b) Election
General rule without §83(b) election
The grant of an NSO is generally not a taxable event unless the option has a readily ascertainable fair market value at grant, which is rare.
Taxation typically occurs at exercise. The employee recognizes ordinary income equal to the difference between the FMV of the stock at exercise and the exercise price paid.
Early Exercise and §83(b) election
Some NSO plans allow “early exercise,” where the employee can exercise the option and receive stock that is still subject to vesting (i.e., a substantial risk of forfeiture). In this case, the stock received upon early exercise is treated as restricted property under §83. The employee may make a §83(b) election within 30 days of the transfer of the stock (i.e., the exercise date), electing to include in income the spread between the FMV of the stock at exercise and the exercise price, even though the stock is not yet vested. If the §83(b) election is not made, the employee is taxed when the stock vests, based on the FMV at that time, which could be higher.
Types of Equity Compensation Not Eligible for §83(b) Election
When considering whether a taxpayer can make an §83(b) election, it is important to recognize specific statutory exclusions. Two key situations where the election is not generally available are:
Incentive Stock Options (ISOs):
Section 83(e)(1) specifically excludes ISOs from §83(a), so an §83(b) election is not available for ISOs under regular tax purposes. However, for AMT purposes, if ISO stock is substantially nonvested, an §83(b) election may be made, but only with respect to the nonvested stock.
Options Without a Readily Ascertainable FMV:
Section 83(e)(3) excludes the transfer of an option without a readily ascertainable fair market value from §83(a), so an §83(b) election is not available for most unvested options themselves (as opposed to the stock acquired upon exercise).
When Should §83(b) Be Used?
The §83(b) election is smart if the underlying securities are expected to rise in fair market value over time. This is usually the case.
However, it is possible that the underlying stock can decrease in value over time, or the employer that granted the equity stock compensation can go out of business. Another possibility is that the equity compensation becomes forfeitable. Any taxes paid in advance, through this §83(b) election, are not refundable in these circumstances.
The §83(b) election is particularly popular among startups and young companies.
The fair market value that is taxed based upon this §83(b) election is added to the basis of the underlying stock. Therefore, when such underlying stock is subsequently sold, the adjusted basis of the stock will be higher and may lower any favorable capital gains upon such sale.
Reporting the §83(b) Election
The taxpayer must either submit Form 15620, Section 83(b) Election, or submit a written statement that contains the following information for the §83(b) election:
The taxpayer’s name, address, and Social Security number
The number and description of the equity compensation
The fair market value of the equity compensation on the grant date
The amount paid for the equity compensation, if any, by the employee
The calendar year in which the equity compensation was granted
The grant date of the equity compensation
Any restrictions that the equity compensation is subject to
The amount included in income under the §83(b) election
Form 15620, or a substitute written statement, can be attached to the tax return for the year the election is made or sent separately to the Internal Revenue Service Center where the tax return is normally filed.
Also, the employer who granted the equity compensation must receive a copy of Form 15620 or a substitute written statement.
As per §83(b)(2), the §83(b) election may not be revoked except with the consent of the Secretary of the Department of the Treasury.
Conclusion
In practice, a §83(b) election is a targeted planning tool, not a default. It can shift future appreciation from ordinary income to capital gain and start the holding period at grant, which is most compelling with restricted stock or early exercised NSOs when meaningful growth is expected and the client can absorb tax now.
The tradeoffs are real: loss of refund if the value falls or the award is forfeited, and no regular tax election for ISOs, with potential AMT implications. Advising clients to decide quickly and document carefully is vital. The election must be filed within 30 days of transfer, is generally irrevocable, increases stock basis by the amount included in income, and requires providing a copy to the employer.
A brief, case-by-case review of growth prospects, forfeiture risk, AMT exposure, and cash flow, paired with timely filing using Form 15620 or a compliant statement, helps ensure the election supports the client’s broader tax and equity compensation strategy.
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