The 83(b) Election, Explained for Founders With Vesting Stock

Sun, 08 Nov 2026 12:44:00 +0000

Founder stock with vesting is not fully owned on the day it is bought. The company can buy back unvested shares if the founder leaves. Section 83 of the tax code treats that stock as “substantially nonvested,” and that label decides when the founder is taxed and on what value.

The 83(b) election changes the timing. Instead of being taxed as the shares vest, the founder chooses to be taxed once, at purchase, on the difference between the stock’s value and the price paid. For founders who pay full value on day one, that difference is zero.

This is general information, not legal or tax advice.

What Section 83 does without an election

Under the default rule, a person who receives stock in connection with services recognizes ordinary income when the stock vests. The amount is the fair market value at vesting minus what the person paid. IRS Publication 525 covers this under restricted property.

Founder stock is issued in connection with services, because the founder’s continued work is what makes it vest. So the default rule applies to founders too.

What the election changes

With an 83(b) election, the founder includes the value at transfer, less the amount paid, in income for the year of transfer. Later vesting is not a tax event. Two other things follow, both from the regulations:

The holding period starts at transfer. Under 26 CFR 1.83-4(a), with an election the holding period begins just after the date of transfer, rather than when the shares vest. That matters for long-term capital gain treatment and for the holding periods in Section 1202.
A forfeiture is a limited loss. Under 26 CFR 1.83-2(a), if the shares are forfeited after an election, the loss is limited to the amount paid minus any amount received. Tax paid because of the election does not come back.

A worked example

Assumptions
- Founder buys 4,000,000 shares of common stock at $0.0001 per share
- Fair market value at purchase: $0.0001 per share (purchase price = value)
- Vesting: 4 years, 25% after a 1-year cliff, then monthly
- By the cliff, the company has raised a seed round, and the
 common stock's fair market value is $0.40 per share

Amount paid at purchase: 4,000,000 x $0.0001 = $400

WITH an 83(b) election (filed within 30 days of purchase)
 Income at purchase: ($0.0001 - $0.0001) x 4,000,000 = $0
 Income at each vesting date: none

WITHOUT an election
 At the 1-year cliff, 1,000,000 shares vest:
 (1,000,000 x $0.40) - (1,000,000 x $0.0001)
 = $400,000 - $100 = $399,900 of ordinary income
 Each later month, about 83,333 shares vest:
 83,333.33 x ($0.40 - $0.0001) = about $33,325 of ordinary
 income per month, at whatever the value is that month

The founder in the second case owes tax on $399,900 of income from stock that cannot be sold. The numbers are illustrative. A real fair market value comes from the company’s valuation, not from this example.

Who should consider filing

Founders buying restricted stock with vesting. This is the main case. The purchase price usually equals fair market value at formation, so the election costs nothing in current tax.
Employees who early-exercise options into unvested stock, if the company’s plan allows it. The election then applies to the exercised shares.
Anyone receiving stock subject to a substantial risk of forfeiture in connection with services, such as a key hire granted restricted stock.

Who does not file

Holders of fully vested stock. There is nothing to elect. The stock is taxed under the normal rules at transfer.
Holders of unexercised stock options. An option is not stock. The election applies once stock is transferred.
Holders of restricted stock units. RSUs are a promise to deliver shares later, so no property is transferred at grant.

How the election is filed now

IRS Form 15620 (revised April 2025) is a standard form for the election. Its use is voluntary; a written statement that meets the regulation still works. The form asks for the property, the transfer date, the restrictions, fair market value, the amount paid, and the resulting income.

As of November 5, 2026, the IRS mobile-friendly forms page lists Form 15620 as requiring an IRS Online Account. After filling it in, the filer can submit online or download it for mailing. Paper filing goes to the IRS office where the founder files a federal return.

Either way, the founder must give a copy to the company, as both the form instructions and the regulation require. Keep the online confirmation or the certified mail receipt with the stock purchase agreement.

The deadline

The election must be filed no later than 30 days after the date the property was transferred. There is no general extension for a late election, and it cannot be revoked without IRS consent. Counting the days, weekend and holiday rules, and what founders can do after a missed deadline are covered in a separate article on the 83(b) deadline.

Where it fits in company formation

The election follows the stock purchase, which follows incorporation and the board’s approval of founder stock. The how to start a startup company guide puts it in that sequence, and the co-founder agreement template includes a clause committing each founder to file. The election is a founder’s personal tax filing, but the company has every reason to confirm it happened: investors check for it in diligence.

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