IRS Code Section 83: How Restricted Stock Is Taxed, and When to File an 83(b)

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

IRS Code Section 83 is the part of the Internal Revenue Code that decides when stock or other property you receive for your work becomes taxable income. The default rule: you owe ordinary income tax on the value of the shares when they vest (stop being forfeitable), minus anything you paid for them. Section 83(b) lets you choose to be taxed at the moment the shares are transferred to you instead, by filing a written election with the IRS within 30 days.

For a two-income family in California or Washington, this matters most when one parent joins a startup or pre-IPO company and receives restricted stock or the right to exercise options early. The 83(b) election is not available for RSUs, including RSUs at a public company like Apple, Amazon or Gilead. Getting the 30-day window right can move hundreds of thousands of dollars of future growth out of wage income and into long-term capital gains.

What Section 83 actually says, in plain terms

Section 83 covers “property transferred in connection with the performance of services” (26 U.S.C. §83). Three ideas do most of the work:

• Substantially nonvested. If you could lose the shares (for example, you must stay four years or the company buys them back at your cost), they are not yet taxed.
• Tax at vesting. When the risk of forfeiture lapses, the fair market value of the vested shares, minus what you paid, is compensation income. For an employee it shows up on the W-2 and is subject to income tax and payroll taxes.
• The 83(b) election. You can elect to include the value at transfer instead. Later growth is then taxed only when you sell, as capital gain, and your capital gain holding period starts at transfer rather than at each vest date (§83(f)).

The election must be filed no later than 30 days after the property is transferred, using a written statement or Form 15620, according to IRS Publication 525 (Restricted Property). Pub 525 describes no extension of that window. Once made, the election can be revoked only with IRS consent (§83(b)(2)).

Which equity grants Section 83 reaches, and which it does not

RSUs are excluded because an RSU is an unfunded promise to deliver shares later, which is not “property” until the shares are delivered (Treas. Reg. §1.83-3(e)). If a benefits portal or a colleague tells you to file an 83(b) for RSUs, it is wrong. Our guides on how RSUs count as income and RSUs at private companies cover that path instead.

Worked example: a California couple with startup restricted stock

Assumptions (illustrative): a San Jose couple filing jointly. One parent earns $650,000 in W-2 pay at a large biotech company. The other leaves a big-tech job for a Series B startup at a $250,000 salary and is offered 120,000 shares of restricted stock at $0.25 per share, which is the board’s current fair market value. They pay $30,000 for the shares. Vesting is 25% per year over four years.

Their marginal rate on extra wage income is roughly 51.95%: 37% federal (taxable income above $768,700 for 2026, Rev. Proc. 2025-32), 11.3% California (2025 schedule, the latest the FTB has published, FTB 2025 rate schedules), 2.35% Medicare including the 0.9% Additional Medicare Tax above $250,000 of joint wages (IRS), and 1.3% California SDI on all wages for 2026 (EDD). Social Security is ignored because the startup salary already exceeds the $184,500 wage base for 2026. The state tax deduction is ignored because at this income the SALT cap phases down to $10,000. In vest years when California taxable income passes $1,000,000, the 1% Behavioral Health Services Tax adds one more point on the income above that line (2025 rules, FTB Form 540 booklet), so treat 51.95% as a floor, not an exact figure.

Option A: no 83(b) election

At about 51.95%, that is roughly $296,115 of tax over four years on shares the family cannot sell, because the company is still private. Withholding at the 22% federal supplemental rate will not cover it, so the cash has to come from savings or the other parent’s paycheck.

Option B: file the 83(b) election within 30 days

Income at transfer is value ($0.25) minus price paid ($0.25), which is $0. Tax owed today: $0. Nothing is reported at the vest dates. If the company later goes public and the family sells all 120,000 shares at $10 more than a year after the grant, the full $1,170,000 gain ($1,200,000 minus the $30,000 paid) is long-term capital gain.

Without the election, the same sale would produce $570,000 of earlier wage income plus $600,000 of gain. So the election changes the character of that $570,000 slice. Federally, the slice moves from 37% plus 2.35% Medicare to 20% plus the 3.8% Net Investment Income Tax (IRS), and it no longer bears 1.3% SDI. That is about 16.85 percentage points, or roughly $96,045. California taxes capital gains as ordinary income (FTB), so the state portion gets no lower rate. It can even rise: selling everything in one year bunches the gain, which can push the slice into the 12.3% bracket plus the 1% Behavioral Health Services Tax (13.3% in total on the 2025 schedule) instead of the 11.3% it would have faced at vest. That can give back up to about 2 percentage points of the federal saving. The bigger practical win is that no tax is due years before there is any cash to sell.

The same family in Washington

Washington has no wage income tax for 2026 (WA DOR), so without the election the $570,000 of vest income bears federal income tax and Medicare, with no state income tax. With the election, that growth becomes a long-term capital gain, and Washington’s capital gains tax applies at 7% on gains above the standard deduction ($278,000 for 2025, the latest published) and 9.9% above $1,000,000 of taxable gains (WA DOR). In our example the federal saving is about $88,635 (15.55 points on $570,000), but up to $39,900 of it can come back as Washington capital gains tax if the family is already above the deduction. The election usually still helps, by a smaller margin than in California. Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting in 2028, with details pending, so a vesting schedule that runs past 2027 needs a fresh look.

When the 83(b) election can backfire

The election was cheap in our example because the price paid equaled fair market value. It gets risky when the shares are worth real money and you pay little or nothing for them.

• You pay tax on value you may never keep. Suppose a later-stage company grants 20,000 restricted shares worth $5 each and you pay nothing. Electing means $100,000 of wage income now, about $51,950 of tax at the rate above.
• Forfeiture gives no deduction for that income. If you leave before vesting, the loss you can claim is limited to what you actually paid for the shares, minus anything you get back (Treas. Reg. §1.83-2(a)). In the $5 example, that is a $0 loss against $51,950 of tax already paid.
• The value can fall. If the company fails, the tax paid at election is not refunded. Only a capital loss on the amount you included and paid remains, after a sale or worthlessness.
• Missing day 30 is final. Count from the transfer date on the stock agreement, not from when you signed the offer letter.

For early-exercised ISOs, the election also matters for the alternative minimum tax. Exercising when the spread is zero and electing can keep the AMT adjustment at zero, but the ISO rules are separate from §83 for regular tax, so this is a question for the person preparing your return. Our note on tax on cashless exercise covers the option side.

How to file a Section 83(b) election

1. Confirm the transfer date, number of shares, price paid and fair market value from your stock purchase agreement.
2. Prepare the statement or Form 15620 with the items Pub 525 lists, including your name, address and taxpayer ID, a description of the property, the restrictions, and the value and amount paid. Our step-by-step guide to drafting the election letter walks through each line.
3. Sign it and mail it within 30 days of transfer to the IRS Service Center where you file your return (Pub 525 points to the address in the Form 1040 instructions), by a method that gives you proof of the mailing date.
4. Give a copy to your employer, which Pub 525 requires, and keep the signed copy and mailing proof with your permanent records. You will need them at sale, possibly a decade later.

The decision your family actually has to make

For most W-2 parents, it comes down to three questions. Did I pay full fair market value, so the election costs little or nothing today? Do I expect to stay through vesting? If the election creates tax now, can we pay it from cash without touching the emergency reserve or the kids’ 529s? If the answers are yes, yes and yes, the election is usually worth serious consideration. A large current tax bill on illiquid stock is where families should slow down and run the numbers with their tax adviser. Concentration in one employer’s stock is its own risk, separate from the tax question (see our investment risk management work).

What to document for your kids

An 83(b) election is a decision your children may one day see the result of (a large gain, or shares that went to zero) without ever learning why you made it. Write two paragraphs in your FamilyKnowledge® Library: what you knew about the company at the time, what you were willing to lose, and why. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Is “tax code 83” the same as an 83(b) election?

Not quite. Section 83 is the whole rule for taxing property received for services, including the default of taxing shares at vest. Section 83(b) is one subsection inside it, which lets you choose to be taxed at transfer instead. People often search “tax code 83” when they mean the election, because it is the part that requires action within 30 days.

Can I file an 83(b) election for RSUs?

No. RSUs are a promise to deliver shares in the future, and under Treas. Reg. §1.83-3(e) that promise is not property for Section 83 purposes. RSUs are taxed as wages when the shares are delivered, usually with federal withholding at the 22% optional flat supplemental rate (37% is mandatory on supplemental wages above $1,000,000 in a year) for 2026, which often leaves a balance due at high incomes.

What if I paid nothing and the shares are worth very little?

If the fair market value is near zero at grant, the election creates little income and little tax, and it starts your capital gain holding period. The risk is low in that case. The election matters most, in both directions, when the value is meaningful, so get the board-approved value in writing before deciding.

Next step: if a parent in your household has an offer with restricted stock or early exercise, put the transfer date on the family calendar today and review the numbers within the first week. Our tax management team works through these decisions with families as part of the Tax & Wealth Assessment.

This is general education, not individual tax advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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