Your vesting schedule controls when you owe tax on founder shares. Without a Section 83(b) election, each vesting date creates ordinary income based on that day's value. Founder vesting means shares can be forfeited until time or milestones pass. A Section 83(b) election is a tax filing that moves taxation from vesting to grant.
Table of Contents
- What Happens Without an 83(b) Election?
- How Does an 83(b) Election Move Tax Earlier?
- Why Does the Holding Period Matter?
- What Can Go Wrong and How Do You File?
What Happens Without an 83(b) Election?
Bodman Law explains in its startup founders guide that restricted stock without an election produces ordinary compensation income at each vesting event. The amount equals fair market value then minus what you paid. Rising startup value therefore raises the tax bill. Take a founder who pays nearly nothing for shares at formation.
If large tranches vest after the company value jumps, the spread is taxed as pay. No sale is needed to trigger the bill. This pattern hurts founders who start cheap and grow fast. It also creates cash pressure because tax is due before any exit.
How Does an 83(b) Election Move Tax Earlier?
CoAd explains in its 83(b) Election glossary that a timely election taxes grant-date value minus price paid right away. Later appreciation is then taxed only on sale, generally as capital gain. CoAd also notes the election must reach the IRS no later than 30 days after transfer.
No extension or late relief is available. Early taxation helps when grant value is tiny. A small upfront bill can replace much larger ordinary income as later tranches vest.
Why Does the Holding Period Matter?
Nasdaq Private Market notes in its RSAs and 83(b) explainer that a valid election starts the capital-gains clock on the grant date. Without an election, each vesting tranche starts its own clock toward long-term treatment. That difference affects exit timing.
Founders with an early election can reach long-term status sooner if the sale comes years later. Without an election, early-vested shares may qualify while later shares do not. Check each tranche separately before planning a sale.
What Can Go Wrong and How Do You File?
Cake Equity warns that forfeiture after an election allows no deduction for income already recognized. If the company fails, only out-of-pocket cost can support a capital loss. Shulman Rogers reports in its legal alert on online filing that the IRS added Form 15620 in November 2024. Online filing arrived in mid-2025 through an IRS account with ID.me.
The 30-day deadline is unchanged. Use this quick check before you rely on an election. It prevents the most common timing mistakes. The Internal Revenue Service explains in its script on stock-based compensation that RSUs cannot use Section 83(b) because no property transfers at grant. They are taxed as ordinary income when vested shares are delivered, so send proof the same week you file.
- Confirm you hold restricted stock, not RSUs.
- File once within 30 days of transfer.
- Save IRS proof and share a copy with the company.
- Track grant date, vesting dates, and sale date.