Learn about restricted stock, as outlined in Section 83 of the Internal Revenue Code. The 83(b) election, particularly, is a provision that gives an employee or company founder the option to pay upfront taxes on the fair market value of restricted equity.

CAUTION: The following is an overview of restricted stock under IRC Sec. 83. Consult the regulations for additional details.

Under normal circumstances where an employer compensates an employee for his or her service in the form of stock, the excess of the fair market value of the stock over any amount paid for the stock is treated as income to the employee at the time he or she receives the stock.

However, if the stock is subject to substantial risk or forfeiture because it is restricted (cannot be sold) then income is deferred until the interest in the property either: (1) is no longer subject to that risk, or (2) becomes transferable free of the risk, whichever occurs earlier.

The employee has the option to include the FMV of restricted stock (less any amount paid for the stock) in income in the year the stock is received by filing the so-called Sec 83(b) election within 30 days of the transfer of the restricted stock. The amount of the income recognized as a result of the election is based on the fair market value (FMV) of the shares on the date of grant less any amount the employee paid for the stock. This amount becomes the basis of the stock. The stock's FMV isn't reduced to reflect the restrictions on the stock, unless there is a permanent limitation on the transfer of the stock that would require the employee to resell the stock to the employer at a price determined under a formula.

The benefit of making the election is to permanently fix the compensation element and then any appreciation over and above the basis (the compensation that was included in income) will be eligible for long-term capital gains rates if the stock is held for more than one year (two years if the stock is acquired from an incentive stock option). Caution: If the stock is subsequently forfeited, any loss is a capital loss subject the annual $3,000 overall capital loss limitation.

Note: Prior to 2016 a copy of the Sec 83(b) election had to be attached to the filed 1040. Since many software packages are unable to include attachments, per the final Sec 83 regulations it will no longer be a requirement to attach it to the 1040 (applicable for property transferred on or after January 1, 2016). Rev Proc 2012-29 includes sample language an employee may use for making the election statement.

However, the IRS has now created Form 15620, Section 83(b) Election, released in October 2024, to be used when making the election. A completed and signed Form 15620 is to be submitted to the IRS via mail with the IRS office with which the person who performed the services (i.e., the employee) files his or her federal income tax return. The election must be filed no later than 30 days after the date the property was transferred. If the 30th day following the transfer is a Saturday, Sunday or legal holiday, the election will be considered timely filed if it is postmarked by the next succeeding day which is not a Saturday, Sunday or legal holiday. For more information, see IRC § 83(b)(2) and Treas. Reg. § 1.83–2(b).  https://www.irs.gov/pub/irs-pdf/f15620.pdf

Code Sec. 83 governs the amount and timing of income inclusion for employer stock, transferred to an employee in connection with the performance of services. Under Code Sec. 83(a), an employee must generally recognize income for the tax year in which the employee's right to the stock is transferable or isn't subject to a substantial risk of forfeiture. The amount includible in income is the excess of the stock's fair market value at the time of substantial vesting over the amount, if any, paid by the employee for the stock.

Generally effective for stock options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017 (subject to a transition rule), a qualified employee can elect to defer, for income tax purposes, recognition of income attributable to qualified stock transferred to the employee by the employer. The election applies only for income tax purposes; the application of FICA and FUTA is not affected. (Code Sec. 83(i))

Timing - The election must be made no later than 30 days after the first time the employee's right to the stock is substantially vested or is transferable, whichever occurs earlier.

Deferral Period - If the election is made, the employer has to include the deferred income in the employee's income for the tax year that includes the earliest of:

Thus, under the Sec 83(i) election the longest possible deferral period is 5 years.

Qualified Stock - The election is available for “qualified stock” (defined in Code Sec. 83(i)(2)(A)), attributable to a statutory option. In such a case, the option is not treated as a statutory option, and the rules relating to statutory options and related stock do not apply. In other words, if an employee makes a Section 83(i) election with respect to the exercise of an incentive stock option (ISO), the ISO preferential tax treatment will no longer apply.

Deferred income inclusion also applies for purposes of the employer's deduction of the amount of income attributable to the qualified stock. That is, if an employee makes the election, the employer's deduction is deferred until the employer's tax year in which, or with which, ends the tax year of the employee for which the amount is included in the employee's income as described in (1) - (5) above.

The election applies for qualified stock of an eligible corporation. A corporation is treated as such for a tax year if: (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the US (or any US possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. (Code Sec. 83(i)(2)(C))

Detailed employer notice, withholding, and reporting requirements also apply with regard to the election. (Code Sec. 83(i)(6))

As noted above, the income deferral election generally applies with respect to stock attributable to options exercised or RSUs settled after Dec. 31, 2017. However, under a transition rule, until IRS issues regs or other guidance implementing the 80% and employer notice requirements under the provision, a corporation will be treated as complying with those requirements if it complies with a reasonable good faith interpretation of them. The penalty for a failure to provide the notice required under the provision ($100 per failure, subject to a $50,000 maximum penalty for all failures during a calendar year) applies to failures after Dec. 31, 2017., (Code Sec. 6652)(p) as amended by the Tax Cuts and Jobs Act Sec. 13603(e)) In December 2018, the IRS released initial guidance (IR-2018-246) on Code Sec. 83(i) that covers the following topics:

Please see IR-2018-246 on the IRS web site for details: The IRS plans to issue further guidance on these and other issues in the form of proposed regulations at a later date.