Executives and founders who receive restricted stock face a tax decision at the start: be taxed when the shares are granted, or wait until the restrictions lift. The Internal Revenue Code gives the recipient a short window to choose, and the deadline is fixed by statute.
The General Rule Taxes Shares When They Vest
Under Section 83 of the Internal Revenue Code, property transferred in connection with services is generally included in the service provider’s gross income in the first year the rights become transferable or are no longer subject to a substantial risk of forfeiture. The amount included is the property’s value at that time, minus any amount the person paid. Under this default rule, appreciation between the grant and the vesting date is taxed along with the original value.
The Section 83(b) Election Moves the Tax Date Forward
The statute lets the recipient elect to include the value at transfer, minus any amount paid, in gross income for the year of transfer. Once the election is made, the default rule no longer applies to that transfer. The statute also provides that if the property is later forfeited, no deduction is allowed for the forfeiture, which makes the election a real risk when vesting depends on continued service. Weighing that risk against the benefit of fixing the taxable value at transfer for a specific grant is part of the advice a San Diego equity compensation lawyer gives.
The Deadline Is Short
The election must be made not later than 30 days after the date of the transfer, in the manner the Secretary prescribes. Under 26 CFR 1.83-2, the recipient files a signed written statement, stating that it is made under section 83(b), with the IRS office where the person files a return, and may file it before the transfer. The statement includes:
- The taxpayer’s name, address, and taxpayer identification number.
- A description of the property and the date of transfer.
- The restrictions attached to the property.
- The fair market value at transfer, disregarding certain restrictions, and the amount paid.
The recipient must also give a copy to the person for whom the services were performed. The election can be revoked only with the Commissioner’s consent, which the regulation allows for a mistake of fact when the request is made within sixty days after the mistake becomes known, and a decline in value doesn’t qualify.
The Period Runs From the Transfer Date
The period runs from the transfer date, which can differ from the date an offer letter is signed or a board approves the grant. Check the transfer date. Founders whose shares vest over time should compare the vesting terms in the stock agreement with the founder agreement, which a San Diego founder partnership agreement lawyer can review together.
A sale of the company can accelerate vesting or change the tax picture. How a deal interacts with unvested shares is a question for a San Diego change in control lawyer.
Deferred compensation arrangements follow different rules from restricted stock. They need their own review, which a San Diego deferred compensation lawyer can provide.
Facts That Shape the Decision
Several facts bear on whether to make the election:
- The amount paid for the shares, if any.
- The value of the shares at transfer.
- Whether vesting depends on continued service or on a company event.
- Whether the company may repurchase unvested shares.
- The chance of leaving before the shares vest.
Because the choice has tax consequences, a tax adviser should confirm the numbers. Early-stage companies also have to keep up with startup employment law compliance alongside the equity paperwork.
Restricted stock paperwork involves the stock agreement, board approvals, and the election itself. Founders without in-house counsel may look into fractional general counsel to keep that work organized.
At Grey Ocean, PC, we handle stock options, RSUs, restricted stock, vesting, and equity compensation negotiations for executives, founders, and other recipients of equity grants. Mike Flesuras founded our firm in 2025 after practicing at Mintz.
Decide Before the Window Closes
A 30-day deadline leaves little room to gather information after the shares are issued. Anyone who has received restricted shares, or expects to, can reach out to a San Diego equity compensation lawyer well before the window closes.
