Section 83 — Property Transferred for Services: Restricted Stock & RSUs

When your employer gives you stock that vests over time — or hands you restricted stock units that convert to shares upon meeting a performance target — the IRS is watching and waiting for the moment you actually own the property free and clear. Section 83 of the Internal Revenue Code governs the taxation of all property transferred in connection with the performance of services: restricted stock, RSUs, profits interests in partnerships, and any other property given as compensation that is subject to forfeiture risk. The rule is simple in principle and complex in practice: you recognize ordinary income equal to the fair market value of the property (minus anything you paid for it) at the moment the property is no longer subject to a "substantial risk of forfeiture." That moment — when a vesting cliff is reached, a performance condition is met, or the restriction lapses — triggers income tax and employment taxes on whatever the shares are worth at that instant, at ordinary income rates.

Current Law (2026)

Legal Authority

• 26 U.S.C. § 83(a) — General rule: if property is transferred to any person in connection with the performance of services, the excess of the fair market value of the property over the amount paid must be included in the gross income of the service provider in the first taxable year in which the property is no longer subject to a substantial risk of forfeiture and is either transferable or not subject to forfeiture
• 26 U.S.C. § 83(b) — Election: a service provider may elect (within 30 days of the transfer) to include in income the fair market value of the property at the time of transfer (minus amount paid), notwithstanding any substantial risk of forfeiture; if this election is made, no additional income is recognized when restrictions lapse, and the holding period begins on the date of transfer
• 26 U.S.C. § 83(c) — Special rules: a "substantial risk of forfeiture" exists if the rights to the property are conditioned on the future performance of substantial services or on the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial; transferability alone doesn't eliminate the risk (the property must be freely transferable to an unrelated purchaser)
• 26 U.S.C. § 83(d) — Certain restrictions never lapse: where a restriction on transfer will never lapse (e.g., contractual lock-ups based on regulatory requirements), FMV is determined taking the restriction into account — reduced value is taxed, not the unrestricted FMV
• 26 U.S.C. § 83(h) — Deduction by employer: the employer's deduction equals and is timed to mirror the employee's income inclusion — same amount, same year

How Section 83 Works

Restricted stock: A company grants an employee 10,000 shares of restricted stock at a time when shares are worth $1 each. The shares vest ratably over four years (25% per year). No § 83(b) election is made. In year one, 2,500 shares vest when shares are worth $5. The employee recognizes $12,500 of ordinary income (2,500 shares × $5 FMV). The company withholds income taxes and FICA at that point. The employee's cost basis in the 2,500 shares is $5/share — subsequent appreciation to a sale price of $10/share would be a $12,500 long-term capital gain (if held more than one year from vesting).

The § 83(b) election: The same employee, instead of waiting, files a § 83(b) election within 30 days of receiving the restricted stock grant. They include 10,000 shares × $1 FMV = $10,000 of ordinary income at grant. Now all four years of vesting produce no additional income. When shares are eventually sold at $10/share, the entire gain from $1 to $10 — $90,000 — is long-term capital gain taxed at 0%, 15%, or 20%. If the company fails and the stock is worthless, the employee loses the $10,000 already taxed (no refund) and has a capital loss on the basis.

RSUs are different: RSUs are not "property" under § 83 until shares are actually delivered. You cannot make a § 83(b) election on RSUs because there's no property to elect on — the units are merely unfunded, unsecured contractual promises. RSU taxation is deferred until delivery, at which point the full FMV of the delivered shares is ordinary income. This makes RSUs structurally different from restricted stock even though they achieve similar economic goals: RSUs avoid the need for the employee to pay for shares at grant, at the cost of losing the § 83(b) election option.

The § 83(b) Election: When It Makes Sense

The § 83(b) election is a one-way, 30-day, irrevocable bet. You're paying tax now on the current value in exchange for converting future appreciation from ordinary income to capital gain. It makes the most sense when:

• Grant-date FMV is very low: Early-stage startup equity granted when the company has a de minimis value means the income recognized is small; future upside is entirely capital gain
• Long holding periods: Capital gain treatment requires more than one year from the § 83(b) date (not from vesting), so electing early creates a longer qualifying period
• High confidence in appreciation: If the stock declines or the company fails, the § 83(b) election accelerates income on property that becomes worthless — with no refund

The election must be filed with the IRS within 30 days of the transfer date — not 30 days from vesting, not 30 days after you learn about § 83. Attorneys and tax advisors routinely encounter employees who missed the 30-day window by a week and lost the election permanently.

How It Affects You

If you're a startup founder or early employee receiving restricted stock: File a § 83(b) election within 30 days of receiving the shares — this deadline is absolute, and missing it is irreversible. The election is a single page filed at the IRS service center where you file your taxes, plus a copy to your employer and a copy for your records. It causes you to recognize ordinary income now (the FMV minus what you paid, often near zero if you're early), locking in that small amount as your tax basis — and then all future appreciation is taxed as capital gain when you sell, not as ordinary income at vesting. If you skip the election and the company later grows to $10/share before your 4-year cliff vest, you'll owe ordinary income taxes on $10/share at vesting — potentially hundreds of thousands of dollars in a year when you've received no cash. At a young startup with a low 409A valuation, the election's income inclusion may be $0 or a few hundred dollars. File it.

If you're an employee at a public company receiving RSUs: § 83(b) elections are not available for RSUs (because RSUs are not property until delivery — you can't elect on something you don't own yet). At each vest date, the company will withhold shares to cover taxes at the 22% federal supplemental withholding rate for income up to $1 million — but if your total income puts you in the 32–37% bracket, that 22% withholding leaves a large balance due in April. Track your vesting calendar and make quarterly estimated tax payments to cover the gap. The gross-up effect is significant: if 100 shares vest at $50, that's $5,000 of ordinary income, but after 22% withholding the company delivers about 78 shares to you. If you're actually in the 37% bracket, you owe another $750 at filing.

If you're a senior executive with performance-based equity: Performance RSUs (PRSUs) and performance shares that vest upon financial metric achievement trigger § 83 income in the year the performance condition is certified and shares are delivered — which often creates a large one-time income spike in a single year. This income is subject to FICA taxes up to the Social Security wage base ($168,600 in 2024) and Medicare taxes including the 0.9% Additional Medicare Tax above $200,000. If your PRSU payout is large relative to your normal compensation, the FICA on the incremental amount between your salary and the wage base can add meaningful cost. Model your total comp tax cost, not just the equity alone.

If you're a partner or LLC member receiving a profits interest: A profits interest (the LLC/partnership analogue to stock options) is generally not taxable at grant under § 83 if it represents only a right to future profits — not current capital. Rev. Proc. 93-27 and Rev. Proc. 2001-43 provide safe harbors that make profits interests a preferred equity compensation tool for private equity, venture capital, and hedge fund managers — when structured correctly, all appreciation is taxed as capital gain (often at favorable carried interest rates). The key: the profits interest must have zero value on the date of grant (i.e., if the partnership were liquidated on the grant date, the profits interest holder would receive nothing). Grants where the recipient receives any allocation of existing equity are not profits interests and trigger immediate ordinary income.

State Variations

California, New York, and most states follow federal § 83 treatment and tax the vesting income as ordinary income in the year of vesting. However, states differ significantly on capital gain rates — California taxes all capital gains as ordinary income, eliminating one of the key advantages of the § 83(b) election for California residents. New York follows federal long-term capital gain preferential rates.

States may also assert taxing jurisdiction on equity compensation for employees who worked in the state during the vesting period, even if the employee has since moved. New York and California are particularly aggressive about sourcing restricted stock and RSU income to periods of in-state employment.

Pending Legislation

No major changes to § 83 are pending. Treasury and IRS have periodically updated guidance on partnership profits interests and the interaction of § 83 with § 409A (deferred compensation) — ensuring that forfeiture provisions are not disguised § 409A plans. Proposals to extend § 83(b) election availability to RSUs have not advanced.

Recent Developments

IRS Rev. Rul. 2014-2 addressed the employment tax treatment of restricted stock for FICA purposes, confirming that FICA applies at vesting (or at § 83(b) election for restricted stock). Treasury regulations under § 83 finalized in 2016 clarified that the substantial risk of forfeiture analysis requires an objective determination — subjective intent or company practice isn't enough. The IRS has increased audit focus on § 83(b) elections that were not properly filed within 30 days or not sent to the correct service center.

• OBBBA capital gains rates and § 83 strategy: The One Big Beautiful Bill Act preserved the existing long-term capital gains rate structure (0%, 15%, 20% + 3.8% NIIT). The OBBBA did not change the § 83(b) election rules or the basic mechanics of restricted stock taxation. However, the permanence of the current rate structure affects the § 83(b) election calculus: an employee who files a § 83(b) election at grant converts future appreciation from ordinary income (up to 37% + FICA) to long-term capital gains (20% + 3.8%) — a 13-17 percentage point rate advantage. With the rate spread confirmed permanent by OBBBA, § 83(b) elections remain highly valuable for restricted stock with significant appreciation potential.
• RSU withholding and "sell to cover" mechanics: Restricted Stock Units (RSUs) — which technically are not subject to § 83 because they are unsecured promises to deliver stock, not actual stock — vest and are taxable as ordinary income at delivery. Most public company RSU plans use "sell to cover" withholding: the company sells enough shares at vesting to cover the required FICA and federal withholding, delivering the net shares to the employee. The employee's basis in the delivered shares equals the FMV at vesting. The shares sold to cover withholding generate a same-day sale with a small gain or loss. IRS has increased enforcement on RSU income underreporting — particularly for employees who receive RSU income in Box 12 of W-2 but don't realize the RSU shares are fully included in Box 1 wages.
• Early exercise and § 83(b) for startup equity: Startup employees often receive restricted stock (not options) subject to vesting schedules; founder stock is typically low-priced restricted stock subject to repurchase. Early exercise of vested or unvested restricted stock, combined with a § 83(b) election, can start the LTCG holding period running from the grant date — and can also start the five-year clock for the QSBS exclusion earlier — a significant advantage when the company's value increases substantially. The § 83(b) election must be filed within 30 days of the property transfer (not within 30 days of vesting); missing this deadline results in ordinary income treatment at vesting. IRS requires § 83(b) elections to be filed by certified mail or personal delivery to the IRS service center with jurisdiction over the taxpayer's return, not merely attached to the tax return.
• Performance shares and the "substantial risk of forfeiture" question: Performance-based restricted stock (PSUs/PSAs) with performance conditions — where shares are earned based on achieving revenue, EBITDA, or TSR targets — raises complex § 83 questions about when the "substantial risk of forfeiture" lapses. If performance conditions create a genuine risk of forfeiture (not merely a low probability based on the company's trajectory), the § 83 income is deferred until the performance condition is satisfied. IRS has challenged performance share designs where the performance hurdle is set far below expected performance, arguing the risk of forfeiture is not "substantial." Proper performance condition design requires a genuine, meaningful chance that shares will be forfeited.