§83(b) Election on Restricted Stock
On January 15, 2025, Priya receives 20,000 shares of restricted stock from her employer. The shares vest 25% per year over four years and are forfeitable if she leaves before vesting. On the grant date the fair market value is $10 per share, and Priya pays nothing for the shares. She files a timely §83(b) election within 30 days. The stock price falls to $2 per share by the first vesting date and stays at $2 through all vesting dates. Priya remains employed through all four vesting dates and sells all 20,000 shares in 2030 for $4 per share. She has no other capital transactions and does not make any charitable contributions of the stock. She asks how the §83(b) election changes her ordinary income, her basis, the holding period, and the amount and character of her gain or loss compared with making no election.
1. Compute Priya's ordinary income, basis, and gain or loss with and without the §83(b) election.
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With a timely §83(b) election, Priya includes the excess of FMV over amount paid in 2025: 20,000 × ($10 − $0) = $200,000 ordinary compensation income. Her basis is $200,000. She has no income at vesting. She sells in 2030 for 20,000 × $4 = $80,000. Loss = $80,000 − $200,000 = $120,000. Because her holding period began on the grant date, the loss is long-term capital loss. Without the election, she includes ordinary income at each vesting date based on then-FMV: 20,000 × $2 = $40,000 total. Basis = $40,000. Sale for $80,000 produces $40,000 long-term capital gain; holding period begins at each vesting date, and sale in 2030 is more than one year after the last vesting. The election therefore accelerates $200,000 of ordinary income but converts a $40,000 capital gain into a $120,000 capital loss.
2. How would the answer change if Priya paid $2 per share for the stock?
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If Priya paid $2 per share, she paid $40,000. With §83(b): ordinary income = 20,000 × ($10 − $2) = $160,000 in 2025. Basis = $40,000 paid + $160,000 income = $200,000. Sale for $80,000 produces the same $120,000 long-term capital loss. Without election: at vesting, FMV is $2 and she paid $2, so ordinary income = 20,000 × ($2 − $2) = $0. Basis = $40,000. Sale for $80,000 produces $40,000 long-term capital gain. The election still creates ordinary income now and a larger capital loss later.
3. What are the main risks of making the §83(b) election?
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Priya must pay tax on $200,000 in 2025 even though she receives no cash. If she later forfeits unvested shares, she generally cannot recover the tax paid, and her loss treatment may be limited. The election must be filed with the IRS within 30 days after the transfer and a copy attached to her return; state tax may also apply. If the stock declines, the election can produce a capital loss subject to the $3,000 annual capital loss limitation against ordinary income unless she has capital gains. Without the election, she would have no 2025 tax and only $40,000 ordinary income at vesting. The election is most valuable if she expects substantial appreciation and can fund the tax.