To report an 83(b) election on your tax return, you handle it in two separate years: in the grant year you report the ordinary income equal to the stock’s fair market value minus what you paid, and in the year you sell the shares you report the capital gain or loss on Form 8949 and Schedule D using a basis that includes the income you already recognized. This assumes you filed the election statement with the IRS within 30 days of the grant. Everything below is about the numbers on your Form 1040.
Figure the Income and Your Basis First
The ordinary income equals the fair market value of the stock on the grant date minus the price you paid. If the stock was worth $2.00 per share and you paid $0.01, you recognize $1.99 per share as ordinary compensation income, taxed at your regular rate in the year of the grant.
That same calculation sets your tax basis for the eventual sale. Basis equals what you paid plus the ordinary income you recognized, so in the example above your basis is $2.00 per share. Write this number down and keep it. It is the single figure that prevents you from being taxed twice on the same dollars later.
For publicly traded stock, fair market value is the market price on the grant date. For private company stock, it is almost always the independent 409A valuation your company had prepared. Keep the valuation report; it is what backs up the number you used.
If you are a startup founder who bought restricted stock at incorporation for its fair market value, the ordinary income figure is zero. You still filed the election, and you still have basis equal to what you paid, but there is nothing to report as income for the grant year.
Reporting the Ordinary Income in the Grant Year
Where the income lands on your return depends on how the company handled it.
If the Income Is on Your W-2
For a standard employee grant, the employer includes the 83(b) income in Box 1 of your W-2 and withholds federal income tax, Social Security, and Medicare on it. You file your return the usual way. No separate form or attachment is needed for the 83(b) piece.
Check the Box 1 figure against your own calculation before you file. If it is wrong, ask the employer for a corrected W-2 (Form W-2c). A mismatch between what you report and what the IRS receives from the employer will surface later as a notice.
If the Income Is Not on Your W-2
The income sometimes never reaches a W-2. That happens when the recipient is a non-employee such as an advisor or contractor, when the grant was made after the person left the company, or when the employer simply missed it. In that case you report it yourself on Schedule 1 (Additional Income and Adjustments to Income), on the “Other income” line, with a description such as “Section 83(b) election income.” That amount flows into your Form 1040 and is taxed at your ordinary rate.
If you were an employee and the employer should have withheld Social Security and Medicare but didn’t, Form 8919 (Uncollected Social Security and Medicare Tax on Wages) is how you pay the employee share of those taxes.1Internal Revenue Service. About Form 8919, Uncollected Social Security and Medicare Tax on Wages
If You Received the Stock as a Contractor
Independent contractors, board advisors, and other non-employees generally owe self-employment tax on the 83(b) income as well as income tax. The income goes on Schedule C, and the self-employment tax is figured on Schedule SE. That covers both the employer and employee halves of Social Security and Medicare, so the up-front tax hit is materially larger than an employee’s on the same grant.
State Reporting
Most states with an income tax follow the federal treatment and tax the 83(b) income in the grant year, but not all conform fully, and multi-state situations get complicated fast. If you lived or worked in more than one state between the grant and vesting, or moved during that period, check the specific rules for the states involved.
You Do Not Attach the Election Statement to Your Return
This trips people up because older guidance said otherwise. For property transferred on or after January 1, 2016, the IRS eliminated the requirement to attach a copy of the election statement to your income tax return.2eCFR. 26 CFR 1.83-2 – Election to Include in Gross Income in Year of Transfer The election is filed separately, with the IRS, within 30 days of the grant, and a copy goes to the company. Nothing gets stapled to the 1040. The IRS also released Form 15620 in late 2024 as a standardized template for making the election, but it is optional; any written statement with the required information still works.3Internal Revenue Service. Instructions for Form 15620, Section 83(b) Election
Reporting the Sale of the Stock
The second reporting event is the sale, usually years later. You report it on Form 8949 (Sales and Other Dispositions of Capital Assets), and the totals flow to Schedule D.4Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets The math is sale price minus adjusted basis. The trick is making sure the basis is right.
Use Your Adjusted Basis, Not the Purchase Price
Adjusted basis is what you paid plus the ordinary income you recognized through the election. If you paid $0.01 per share and reported $1.99 of income per share, basis is $2.00. Sell at $10.00 and the taxable capital gain is $8.00 per share, not $9.99. Using the wrong basis is the most common 83(b) error at the sale stage, and it means paying tax twice on the same $1.99.
Holding Period Starts at the Grant Date
The election starts your holding period on the grant date, not the vesting date. That is the whole reason people accept the up-front tax. Stock held more than a year qualifies for long-term capital gains rates, which for most taxpayers run between 0% and 20%.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses On Form 8949, the acquisition date is the grant date.
Fixing the Basis Your Broker Reports
Your broker will send a Form 1099-B when you sell, and the basis on that 1099-B is almost always just what you paid for the shares. It does not include the 83(b) income, because the broker has no way of knowing about the election. You have to correct it on Form 8949.
How you correct it depends on whether the basis was reported to the IRS:6Internal Revenue Service. Instructions for Form 8949
- Basis reported to the IRS (Box A for short-term or Box D for long-term is checked): enter the incorrect basis from the 1099-B in column (e), put adjustment code “B” in column (f), and in column (g) enter the difference between the correct basis and the reported basis as a negative number. That reduces the gain to the right figure.
- Basis not reported to the IRS (Box B or Box E is checked): just enter your correct adjusted basis in column (e). No adjustment code is needed because there is no conflicting number on file.
Most 83(b) sales are long-term, so you will usually be working in Box D or E. The totals carry over to Schedule D.
If You Forfeit Before Vesting
The reporting question people ask least often but should ask more: what if you leave before the stock vests? You forfeit the unvested shares, and the ordinary income tax you paid on the election is not refunded. The statute is explicit that no deduction is allowed for the forfeiture of property on which an 83(b) election was made.7Office of the Law Revision Counsel. 26 US Code 83 – Property Transferred in Connection With Performance of Services
What you can report is a capital loss equal to what you actually paid out of pocket for the forfeited shares, not the fair market value you reported as income. Paid $0.01 per share, forfeit the shares, and the capital loss is $0.01 per share. The tax on the $1.99 of income is a permanent loss.
Records to Keep
The IRS does not maintain a database of 83(b) elections. If you cannot document the election and the income, you cannot defend the higher basis that makes the whole thing worthwhile. Keep, at minimum:
- A signed copy of the election statement (or Form 15620), with proof of timely mailing such as a certified mail receipt. Without proof of timely filing, the IRS can treat the election as invalid.
- The restricted stock grant or purchase agreement, showing share count, price paid, and vesting schedule.
- The 409A valuation or other fair market value documentation supporting the FMV you used. For public stock, a dated record of the market price.
- Your Form 1040 and Schedule 1 from the grant year, as proof you reported the income and established basis.
- The W-2 or other records showing how the income was reported.
Hold everything for at least seven years after the year you report the sale. The audit clock on the sale starts with the return that reports it, not the return that reported the election, and 83(b) stock is often held for years before it is sold. In practice the retention window frequently runs well past a decade.