I favor changing the default for 83(b) elections, particularly for founder stock purchased at fair market value. An automatic election with an informed opt-out could reduce missed filings. But an election can also accelerate real tax on stock that may later be forfeited. Reform should address both problems. This is a proposal; current law still requires a valid election.
What Is an 83(b) Election and Why It Matters
Section 83(b) permits a service provider receiving substantially nonvested property to elect current compensation income equal to its fair market value at transfer, determined without lapse restrictions, minus the amount paid. The relevant event is the property transfer, which may differ from the grant or paperwork date. An ordinary unexercised option or an unfunded RSU is not restricted stock for this purpose.
Assume a founder pays $10,000 for one million restricted shares worth $0.01 each when transferred. A timely election produces **zero compensation income**: $10,000 of value minus $10,000 paid. If the founder instead pays nothing, the inclusion is $10,000. The purchase price cannot disappear from the calculation.
Without an election, assume 250,000 of the purchased shares vest at $5 per share and no earlier tax event occurs. The compensation inclusion is **$1,247,500**: 250,000 × ($5 − $0.01). That is income, not the amount of tax. The remaining unvested shares are not all taxed merely because the first tranche vested.
A valid election generally prevents later vesting from creating additional compensation income. Treas. Reg. §1.83-4 also starts the holding period just after transfer. A later stock sale generally produces capital gain or loss if the stock is a capital asset; favorable long-term rates require the applicable holding period. An election does not guarantee appreciation or QSBS eligibility.
The Current System and Its Fundamental Problem
Current law uses an opt-in election. Section 83(b)(2) generally requires filing no later than 30 days after the property transfer. The equity paperwork should identify the relevant date, explain the decision, and assign responsibility for filing and retaining proof.
A signed election must be filed with the IRS in the prescribed manner, and required copies must be furnished. Form 15620 provides a standardized form. Sending a copy only to the company does not satisfy the IRS filing requirement. Missing company records do not, by themselves, prove that an election was never filed.
The Deadline and Limited Timing Relief
The deadline is statutory, so ordinary discretionary relief for regulatory elections under Treas. Reg. §301.9100-3 is not a general cure for forgetting to file. But it is wrong to say every day-31 filing fails: section 7503 can move a deadline falling on a Saturday, Sunday, or legal holiday to the next qualifying day. Applicable IRS disaster relief may also postpone a deadline. Check the specific relief; do not assume a general extension exists.
The Case for Reversing the Presumption
My proposed reform would change the legal default for qualifying restricted-stock transfers unless the recipient affirmatively opted out. A sensible starting point would be stock purchased at fair market value, where the initial compensation inclusion is zero. Congress would need to define the covered transfers, opt-out deadline, notice requirements, and reporting duties.
The proposal should reduce accidental missed elections while preserving informed choice. It would need to specify what happens when a company fails to give notice or report the transfer. These are proposed rules, not today's law.
**Who might opt out?** Someone facing substantial current tax on illiquid stock, a meaningful risk of forfeiture, or expected loss in value may reasonably prefer the ordinary rules. Under Treas. Reg. §1.83-2, forfeiture does not produce a deduction for compensation already included through the election; any allowable forfeiture loss generally reflects the amount paid less recovery. An election is not automatically best for every employee.
Counterarguments and Responses
**Revenue:** Elections can change both the timing and character of income. The net revenue effect requires a fiscal estimate; I do not have a score establishing that this proposal would be revenue-neutral or increase collections.
**Employer burden:** Mandatory notices, opt-outs, reporting, and valuation records would add duties. That is a real design question, even if the company already maintains equity records.
**Employee choice:** An opt-out is meaningful only if recipients understand the current tax and forfeiture risk and have time to decide. Under current law, an election generally cannot be revoked without IRS consent. The proposal should not imply that today's elections are freely reversible.
**Implementation:** Prospective application would avoid pretending old missed elections were valid. Any relief for earlier transfers would require separate legislative treatment.
Electronic Filing: A Partial Solution
Electronic submission improves the filing record. Save the confirmation and submitted election. A submission confirmation does not establish that the valuation, transfer date, or other substantive statements were correct. The online process still requires an affirmative decision and timely submission.
Practical Advice for Founders Today
Confirm the transfer date and applicable deadline promptly. If electing, use the available IRS online process or a properly completed paper election, following current instructions. For paper filings, use a qualifying mailing method and retain proof. Delivery to an adviser or company is not IRS submission.
Furnish a copy to the person for whom services are performed and, if different, the property transferee, as required by Treas. Reg. §1.83-2(d). Retain the election, submission or mailing evidence, purchase agreement, payment records, and valuation support together. Keep your own file as well as the company's copy.
Obtain advice when the economics or transfer date are unclear. Review the initial spread, liquidity, forfeiture terms, and valuation before deciding. Identify who prepares, signs, submits, and confirms the filing; the work and cost depend on the facts.
A Proposal for Reform
A missed filing should not be the predictable failure point in routine founder-stock issuances. I favor an automatic-election framework for suitable transfers, with informed choice and clear administrative rules. Reducing missed filings should not create unexpected current tax for employees who cannot afford it.
For now, evaluate the election promptly after a restricted-stock transfer and complete the required filing if electing. The policy argument changes none of today's obligations.
For more details on how to file an 83(b) election and the mechanics of the process, see our 83(b) Election Complete Guide.
This post is for educational purposes only and is not legal or tax advice. Consult a qualified attorney about your specific situation.
