Section 83(b) Election for Restricted Stock and Stock Options
Using a tax election to reduce the tax burden on restricted stock and stock options
Samuel D. Swisher, JD
Vantage Financial Partners Limited
November 12, 2004
Executive Summary: With the increase in restricted stock, executives should be aware of the tax election
allowed under Section 83(b) of the IRS Code. This election is most useful if the value
of the stock is low at the grant and has potential to rise significantly in the future. This
most often occurs in start up companies or companies contemplating an IPO. The
election allows the executive to take into the income the lower grant value and then is
given capital gain treatment when it is sold.
Among the various ways to compensate employees are restricted stock and/or stock options. Each is designed to
provide deferred compensation tied to the fortunes of the company. In the proper situation, making a Section 83(b)
election can be very beneficial for the employee.
Typically the company gives the employee restricted stock which vests if the employee remains with the company for
at least a period of years (often 2 or more). Under Section 83 of the Internal Revenue Code, if the stock has not
vested, the employee has no income to recognize at the time of grant. However, when the stock vests, the employee
has compensation income equal to the fair market value of the stock (less any cost he might have paid at the outset)
at the date of vesting. This income is taxed at ordinary tax rates.
For example, an employee is given 5000 shares of restricted stock in a startup company. The stock will only vest if
the employee remains with the company for 2 years. At the time of issuance the stock is worth $1 per share.
Shortly thereafter the company goes public. The stock is selling for $30 per share at the vesting date two years later.
Under the normal rules of Section 83, the employee has no compensation at the