Who should consider making a Section 83(b) election?

Individuals who receive restricted stock awards (RSAs), early-exercisable stock options (ISOs or NSOs), or profits interests in an LLC that are subject to vesting should consider an 83(b) election. It is particularly beneficial for founders and early employees of high-growth companies where the stock value is expected to rise substantially.

What is the deadline for filing a Section 83(b) election?

The election must be filed with the IRS within 30 days of the grant date of the restricted property. This deadline is strict, with no extensions or exceptions. Missing it means you lose the opportunity to make the election for that grant.

What happens if I don't make a Section 83(b) election?

If you don't make the election, you will be taxed on the fair market value of your restricted property as it vests. The difference between the FMV at vesting and your purchase price will be treated as ordinary income, which is typically taxed at higher rates than long-term capital gains. This can lead to a significant tax bill, especially if the company's value has increased considerably.

Can I cancel a Section 83(b) election after I've filed it?

No, a Section 83(b) election is irrevocable once it has been filed with the IRS. This underscores the importance of careful consideration and, ideally, consultation with a tax professional before making the election.

What are the risks associated with a Section 83(b) election?

The primary risks include paying tax on stock that might later be forfeited (if you leave the company before vesting) or on stock that decreases in value. The IRS does not provide refunds for taxes paid on forfeited or depreciated stock under an 83(b) election. It's a bet on the company's future success.

Has the process for filing Section 83(b) elections changed recently?

Yes, in November 2024, the IRS introduced Form 15620, Section 83(b) Election , to standardize the filing process. Previously, taxpayers often used a model letter. This new form aims to simplify compliance, but the 30-day deadline and other requirements remain critical.

Section 83(b) Election — Complete 2026 Guide

Overview: Understanding the Section 83(b) Election

The Section 83(b) election is a critical tax strategy for individuals who receive restricted stock or other unvested property as compensation for services. It allows taxpayers to elect to be taxed on the fair market value (FMV) of the restricted property at the time of grant, rather than at the time it vests. This can lead to significant tax savings, especially for high-growth companies where the value of the equity is expected to appreciate substantially over time.

What is a Section 83(b) Election?

Under normal IRS rules, when an employee or service provider receives restricted stock or other property that is subject to a substantial risk of forfeiture (i.e., it hasn't vested yet), they are taxed on the value of that property at the time it vests. The taxable amount is the difference between the fair market value (FMV) of the property at vesting and any amount paid for it. This income is treated as ordinary income.

A Section 83(b) election, as provided by Section 83(b) of the Internal Revenue Code (IRC), allows the recipient to accelerate the tax event. Instead of waiting until vesting, the taxpayer chooses to include the FMV of the restricted property (less any amount paid for it) in their gross income in the year it was granted. This election must be made within 30 days of the grant date.

The primary benefit of making an 83(b) election is that any future appreciation in the value of the stock, from the grant date to the vesting date and beyond, will be taxed at the lower long-term capital gains rates (assuming the stock is held for more than one year after the election). Without the election, the appreciation up to the vesting date would be taxed as ordinary income, which typically has a higher rate.

Who Qualifies for a Section 83(b) Election?

The Section 83(b) election is available to individuals who receive restricted property in connection with the performance of services. This commonly includes:

Founders and Early-Stage Employees: Often receive Restricted Stock Awards (RSAs) where the shares are subject to vesting.
Employees with Early-Exercisable Stock Options: Those who exercise Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs) before they are fully vested. The 83(b) election applies to the shares acquired through early exercise, not the options themselves.
Recipients of Profits Interests in an LLC: Profits interest units (PIUs) are a form of equity common in LLCs or LLPs. Filing an 83(b) election for PIUs is highly recommended to preserve favorable tax status, especially if the PIUs are issued with an FMV of $0.

The key qualifying factor is that the property received must be subject to a substantial risk of forfeiture (i.e., unvested). If the stock is fully vested at the time of grant, an 83(b) election is not applicable.

How to Claim the Section 83(b) Election

Claiming the Section 83(b) election is a time-sensitive process that requires strict adherence to IRS rules. The election must be made within 30 days of the grant date of the restricted property. There are no extensions or exceptions to this deadline.

Steps to File:

Gather Grant Details: Collect all necessary information about your equity grant, including your name, address, taxpayer identification number, the grant date, number of shares, type of shares, the fair market value (FMV) of the stock on the grant date, and the amount you paid for it.
Complete Form 15620: The IRS introduced Form 15620, Section 83(b) Election, in November 2024, which standardizes the election process. Previously, taxpayers had to draft a model letter. Complete this form with all the gathered details.
Sign and Copy: Sign the completed Form 15620. Make at least three copies: one for the IRS, one for your company's records, and one for your personal tax files. It is also common to include a cover letter.
Mail to the IRS: This is the most critical step. The completed and signed Form 15620, along with any cover letter, must be postmarked and mailed to the appropriate IRS Center where you would normally file your income tax return. It is highly recommended to use certified mail with a return receipt requested. This provides official proof of timely filing, which is crucial if the IRS ever questions your election.
Distribute Copies: Provide a copy of the signed election to your company. Keep your personal copy and the certified mail receipt in a safe place with your tax records.

Important Note: The 30-day clock starts on the date the board approves the grant, not necessarily when you receive the official paperwork. Missing this deadline means you forfeit the opportunity to make the election for that grant, and you will be taxed under the default rules as your shares vest.

2026 Limits, Amounts, or Rates

The Section 83(b) election itself does not have specific limits or amounts that apply directly to the election. Instead, its benefit is tied to the prevailing ordinary income and capital gains tax rates for the 2026 tax year. By making the election, you aim to convert what would otherwise be ordinary income (taxed at potentially higher rates) into capital gains (taxed at generally lower rates) for future appreciation.

2026 Federal Income Tax Rates (Illustrative, consult IRS for exact brackets):

While specific brackets are subject to inflation adjustments, the general structure for 2026 is expected to remain similar to prior years, with rates ranging from 10% to 37% for ordinary income. For example, for single filers, the 10% bracket might apply to income up to approximately $12,400, and the 12% bracket up to around $50,400. The highest ordinary income tax rate of 37% typically applies to incomes exceeding $640,600 for single filers and $768,700 for married couples filing jointly [1] [2] [3].

2026 Long-Term Capital Gains Tax Rates:

For assets held for more than one year, long-term capital gains are generally taxed at preferential rates of 0%, 15%, or 20%. These rates depend on your taxable income:

0% Rate: Applies to lower income brackets. For 2026, this might apply to single filers with taxable income up to approximately $49,450, and married couples filing jointly up to around $98,900 [4] [5].
15% Rate: Applies to the majority of taxpayers. For 2026, this might apply to single filers with taxable income between approximately $49,451 and $545,500, and married couples filing jointly between $98,901 and $613,700 [4] [5].
20% Rate: Applies to high-income taxpayers. For 2026, this might apply to single filers with taxable income exceeding approximately $545,500, and married couples filing jointly exceeding $613,700 [4] [5].

By making the 83(b) election, you lock in the ordinary income tax on the grant-date FMV (which is often very low or zero for early-stage companies) and ensure that any subsequent growth is taxed at these potentially lower long-term capital gains rates when you eventually sell the shares, provided you meet the holding period requirements.

Common Mistakes That Cost Taxpayers Money

While the Section 83(b) election can be highly beneficial, several common mistakes can negate its advantages or lead to adverse tax consequences:

Missing the 30-Day Deadline: This is by far the most common and costly mistake. The IRS strictly enforces the 30-day filing window from the grant date. There are no extensions or exceptions. A late filing renders the election invalid, and you will be taxed under the default rules.
Incorrect Grant Date: Taxpayers sometimes confuse the grant date (when the board approves the grant) with the date they receive the paperwork. The 30-day period begins on the actual grant date, which can be earlier than the document receipt date.
Failure to Send Certified Mail with Return Receipt: Without proof of timely mailing and receipt, it can be challenging to defend your election if the IRS questions it. Certified mail with a return receipt provides essential documentation.
Not Understanding the Risks: The election is a bet on the company's future. If the company fails or the stock loses value after the election, you will have paid tax on property that is now worthless, and the IRS does not offer refunds in such cases. Similarly, if you forfeit unvested shares by leaving the company, any tax paid on those shares is not recoverable.
Not Consulting a Tax Advisor: The complexities of equity compensation and tax law make professional advice invaluable. A tax advisor can help assess your specific situation, understand the implications, and ensure proper filing.
Filing for Ineligible Property: The 83(b) election only applies to restricted property subject to a substantial risk of forfeiture. Filing for fully vested stock or stock options themselves (rather than the shares acquired through early exercise) is incorrect.
Incomplete or Incorrect Information: Errors on Form 15620, such as incorrect FMV or share count, can invalidate the election.

IRS Code Section Reference

The Section 83(b) election is governed by Internal Revenue Code Section 83(b). This section outlines the rules for the taxation of property transferred in connection with the performance of services. Specifically, it allows a taxpayer to elect to include in gross income the fair market value of such property at the time of transfer, less any amount paid for it, notwithstanding that the property is subject to a substantial risk of forfeiture and is not transferable. The election must be made in accordance with regulations prescribed by the Secretary and filed within 30 days of the date of transfer.

Ready to Optimize Your Equity Compensation?

Navigating the intricacies of restricted stock and Section 83(b) elections can be complex, but making the right decisions can lead to substantial tax savings. Don't leave your financial future to chance. Our experienced tax strategists and CPAs at Uncle Kam are here to provide personalized guidance tailored to your unique situation.

Book a call with us today to discuss your Section 83(b) election and develop a comprehensive tax plan that maximizes your wealth.

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References:

Frequently Asked Questions About Section 83(b) Election

Q: What is a Section 83(b) election?: A: A Section 83(b) election is an IRS provision that allows individuals who receive restricted stock or other unvested property as compensation to pay taxes on its fair market value (FMV) at the time of grant, rather than when it vests. This can be advantageous if the stock is expected to increase significantly in value, as future appreciation will be taxed at lower long-term capital gains rates.
Q: Who should consider making a Section 83(b) election?: A: Individuals who receive restricted stock awards (RSAs), early-exercisable stock options (ISOs or NSOs), or profits interests in an LLC that are subject to vesting should consider an 83(b) election. It is particularly beneficial for founders and early employees of high-growth companies where the stock value is expected to rise substantially.
Q: What is the deadline for filing a Section 83(b) election?: A: The election must be filed with the IRS within 30 days of the grant date of the restricted property. This deadline is strict, with no extensions or exceptions. Missing it means you lose the opportunity to make the election for that grant.
Q: What happens if I don't make a Section 83(b) election?: A: If you don't make the election, you will be taxed on the fair market value of your restricted property as it vests. The difference between the FMV at vesting and your purchase price will be treated as ordinary income, which is typically taxed at higher rates than long-term capital gains. This can lead to a significant tax bill, especially if the company's value has increased considerably.
Q: Can I cancel a Section 83(b) election after I've filed it?: A: No, a Section 83(b) election is irrevocable once it has been filed with the IRS. This underscores the importance of careful consideration and, ideally, consultation with a tax professional before making the election.
Q: What are the risks associated with a Section 83(b) election?: A: The primary risks include paying tax on stock that might later be forfeited (if you leave the company before vesting) or on stock that decreases in value. The IRS does not provide refunds for taxes paid on forfeited or depreciated stock under an 83(b) election. It's a bet on the company's future success.
Q: Has the process for filing Section 83(b) elections changed recently?: A: Yes, in November 2024, the IRS introduced Form 15620, Section 83(b) Election, to standardize the filing process. Previously, taxpayers often used a model letter. This new form aims to simplify compliance, but the 30-day deadline and other requirements remain critical.

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