How 4-Year Vesting Schedules Interact with 83(b) Elections

When you receive restricted stock subject to a vesting schedule, IRC Section 83(a) says you do not recognize income until the stock is substantially vested, meaning the restrictions lapse. With a standard 4-year vesting schedule and a 1-year cliff, you recognize ordinary income when each tranche vests. The income equals the fair market value of the shares at vesting minus what you paid for them. For example, a founder who bought 1,000,000 shares at $0.001 has 250,000 shares vest at the one-year cliff. If the shares are worth $5 by then, that tranche alone is $1,249,750 of ordinary income ($4.999 x 250,000), taxed at rates up to 37% federally plus state tax, and treated as wages subject to withholding and payroll tax if you are an employee. The same thing then happens every month for the next three years, with no sale to fund the tax.

An 83(b) election tells the IRS you want to recognize income on the full grant at the time of purchase, not at vesting. If you file within 30 days of receiving the stock and you paid fair market value (or close to it) at the time of the grant, your ordinary income is minimal or zero. For a founder who purchases 1,000,000 shares at $0.001 per share when the fair market value is also $0.001, the total ordinary income recognized is zero. All future appreciation is then taxed as capital gain when you eventually sell. Your holding period starts on the purchase date, so a sale more than one year later gets long-term rates, currently up to 20% plus the 3.8% net investment income tax. The election also starts the QSBS holding period on the purchase date for the whole grant, instead of separately for each tranche as it vests.

The risk of an 83(b) election is that you pay tax on stock you might forfeit. If you file the election, recognize income, and then leave the company before fully vesting, the unvested shares are forfeited. You do not get a refund of the tax you paid on those forfeited shares. You also cannot deduct the income you reported. Under Treas. Reg. §1.83-2(a), your loss is limited to what you paid for the shares minus anything you get back on forfeiture, and it is a capital loss. For founders who paid $0.001 per share, that is effectively nothing. This is why the election makes the most sense when the stock value is very low, typically at incorporation. The tax at risk is tiny, and the upside protection is enormous.

Skipping the 83(b) on a standard four-year schedule can turn a $1,000 stock purchase into almost $1.9 million of ordinary income spread over four tax years. Here is a hypothetical example using 1,000,000 shares bought at $0.001, a one-year cliff and monthly vesting after that, with the company's value rising each year. The prices are illustrative, not a forecast.

Each row is 250,000 times the value minus the $0.001 paid. The total is $1,899,000 of wage income, taxed at ordinary rates in the year each tranche vests, usually with no sale to pay the bill.

With a timely 83(b), income at purchase is $0 (value $0.001 minus price $0.001, times 1,000,000). If the company is later sold at $5 a share, the founder has a $4,999,000 gain ($5,000,000 minus $1,000 basis), all long-term and potentially eligible for the QSBS exclusion. Without the election, basis would be $1,900,000 and the remaining $3,100,000 of gain would be capital gain, but the holding period for each tranche starts only at its vesting date, so shares that vested in the last year could produce short-term gain.

You file an 83(b) by sending the IRS a signed election, on Form 15620 or an equivalent statement, within 30 days of the stock transfer. The order we use with founders:

1. Confirm the transfer date. It is the date you sign the restricted stock purchase agreement and pay for the shares (or exercise early-exercisable options).
2. Count 30 days from that date and put the deadline in your calendar. If day 30 is a weekend or legal holiday, IRC §7503 moves it to the next business day.
3. Complete Form 15620: your name, address and taxpayer identification number, a description of the shares, the transfer date, the restrictions (the vesting schedule), the fair market value at transfer, the amount you paid, and the resulting income (often $0).
4. File it once: online through the IRS website with ID.me, or by certified mail to the IRS center listed for your state, keeping the postmarked receipt.
5. Give a copy to the company, as Treas. Reg. §1.83-2(d) requires, and keep your own copy with the confirmation permanently. You will need it at a sale, a financing diligence review or an audit.

Foreign founders without a US taxpayer number should start the ITIN process early, because the 30 days will not wait for it.

If investors ask you to put already-vested founder shares back on a vesting schedule, no new 83(b) is generally required. Rev. Rul. 2007-49 (Situation 1) holds that adding new restrictions to shares you already own is not a transfer under §83, so nothing is taxed when those shares later vest. The ruling is narrow. If the deal instead exchanges your shares for new restricted shares, as in a merger, the ruling's other situations treat that as a new transfer, and a new 83(b) is usually wise.

Acceleration does not change the 83(b) analysis. With a valid election, shares that accelerate on an acquisition (single-trigger or double-trigger) produce no ordinary income because you already took them into income at purchase. Without one, acceleration makes all remaining unvested shares vest at once at the deal price, which can be the largest ordinary income event of a founder's career.

Early exercise works the same way for employees with options. Exercising unvested options and filing an 83(b) within 30 days of exercise starts the capital gain and QSBS holding periods at exercise. It costs cash up front, and if the exercise price is below fair market value, the spread is taxed at exercise (and for ISOs, can count toward AMT).

A missed 83(b) deadline cannot be fixed by filing late; the 30-day window is set by IRC §83(b)(2) and the IRS has no general authority to extend it. The realistic options each have a cost:

• Leave it alone and recognize income as each tranche vests. If the company's value is still close to what you paid, the early tranches may produce little income, and this can be the cheapest path.
• Have the company repurchase the unvested shares and issue new restricted shares, then file a new 83(b) within 30 days of the new issuance. Income is measured at the value on the new date, so this works best before a priced round.
• Remove the vesting restrictions, which makes all shares vested and taxable now at current value, after which no further income arises.

Any of these needs board approval and careful documentation, and the choice depends on the current 409A or fair market value. Our guide on 83(b) deadline consequences walks through each path in more detail.

The 30-day deadline runs from the date you receive the property, which is typically the date the restricted stock purchase agreement is executed and you pay for the shares. It is not 30 days from incorporation, and it is not 30 days from the board resolution authorizing the issuance. If you receive your shares on January 15, the 83(b) election must be filed by February 14 (if day 30 falls on a weekend or legal holiday, the next business day works under IRC §7503). You can file IRS Form 15620 online through the IRS website after an ID.me sign-in, which gives an immediate confirmation, or mail it to the IRS service center for your state by certified mail, where the postmark date controls. Use one method, not both, and give the company a copy. You no longer attach a copy to your Form 1040.

If your stock option plan allows early exercise, the 30-day clock starts when you exercise, not when the options were granted. An 83(b) cannot be filed on an unexercised option. This is general information, not tax advice for your specific facts.