Section 83

Section 83 of the Internal Revenue Code sets the tax treatment of any property, including employer stock, transferred to an employee or contractor in exchange for services. The default rule under Section 83(a) is that the excess of FMV over the amount paid becomes ordinary income when the property vests, meaning when it is no longer subject to a substantial risk of forfeiture. Section 83(b) allows an election to recognize income at transfer, and Section 83(h) lets the employer deduct the same amount the employee recognizes.

Example: a senior engineer buys 50,000 shares of restricted stock at $1 when FMV is $4. Without an 83(b), the $3 spread per share becomes ordinary income as each tranche vests, at whatever FMV is on the vesting date. With an 83(b) filed within 30 days, the $150,000 total spread is ordinary income in the transfer year, and all future gain is capital.

Common mistake: treating RSUs under Section 83. RSUs are contract rights, not property transfers, so Section 83(a) does not apply at grant. They are taxed under the rules for deferred compensation and wage recognition.

Section 83 matters at any restricted stock grant, founder share purchase, and early-exercise event.