83(B) ELECTION
Back to GlossaryDefinition
An IRC election to recognize income at grant (rather than vesting) on restricted stock, potentially lowering tax if the value later rises.
Summary
An 83(b) election is a tax strategy available to employees who receive restricted stock from their employer. Normally, you'd pay taxes when the stock vests (becomes yours), but this election lets you choose to pay taxes upfront when you first receive the restricted stock instead. The key benefit is that if the stock value increases significantly between grant and vesting, you avoid paying taxes on that appreciation. However, it's risky because if you pay taxes upfront and the stock loses value or you forfeit it, you can't get those taxes back.
Usage Context
Critical when studying executive compensation, employee stock plans, tax planning strategies, and startup equity compensation structures
Common Confusions
- Thinking it applies to all types of stock compensation (it only applies to restricted stock, not options)
- Believing you can make the election anytime (must be within 30 days of grant)
- Assuming it's always beneficial (can backfire if stock value decreases)
- Confusing with other tax elections or thinking it's reversible
- Not understanding that you still owe taxes even if you can't sell the stock yet
