The following is an overview of restricted stock under Sec 83. Consult the regulations for additional details.
Under normal circumstances where an employer compensates an employee for his or her service in the form of stock, the excess of the fair market value of the stock over any amount paid for the stock is treated as income to the employee at the time he or she receives the stock.
However, if the stock is subject to substantial risk or forfeiture because it is restricted (cannot be sold) then income is deferred until the interest in the property either: (1) is no longer subject to that risk, or (2) becomes transferable free of the risk, whichever occurs earlier.
The employee has the option to include the FMV of restricted stock (less any amount paid for the stock) in income in the year the stock is received by filing the so-called Sec 83(b) election within 30 days of the transfer of the restricted stock. The amount of the income recognized as a result of the election is based on the fair market value (FMV) of the shares on the date of grant less any amount the employee paid for the stock. This amount becomes the basis of the stock. The stock's FMV isn't reduced to reflect the restrictions on the stock, unless there is a permanent limitation on the transfer of the stock that would require the employee to resell the stock to the employer at a price determined under a formula.
The benefit of making the election is to permanently fix the compensation element and then any appreciation over and above the basis (the compensation that was included in income) will be eligible for long-term capital gains rates if the stock is held for more than one year (two years if the stock is acquired from an incentive stock option). Caution: If the stock is subsequently forfeited, any loss is a capital loss subject the annual $3,000 overall capital loss limitation.
Note: Prior to 2016 a copy of the Sec 83(b) election had to be attached to the filed 1040. Since many software packages are unable to include attachments, per the final Sec 83 regulations it was not requirement to attach it to the 1040 (applicable for property transferred on or after January 1, 2016). Rev Proc 2012-29 includes sample language an employee may use for making the election statement.
Section 83(b) Election Form Released – However, the IRS has now created Form 15620, Section 83(b) Election, released in October 2024, to be used when making the election. A completed and signed Form 15620 is to be submitted to the IRS via mail with the IRS office with which the person who performed the services (i.e., the employee) files his or her federal income tax return. The election must be filed no later than 30 days after the date the property was transferred. If the 30th day following the transfer is a Saturday, Sunday or legal holiday, the election will be considered timely filed if it is postmarked by the next succeeding day which is not a Saturday, Sunday or legal holiday. For more information, see IRC § 83(b)(2) and Treas. Reg. § 1.83–2(b). https://www.irs.gov/pub/irs-pdf/f15620.pdf