If you earn shares through vesting by remaining with a company, the Internal Revenue Service treats that equity as taxable income as it vests if it is worth more than you initially paid for it. If you exercise options prior to full vesting, or if you receive shares of restricted stock, you can elect to pay taxes on it immediately (on the grant date) rather than waiting to pay taxes at the time the shares vest. This accelerates your ordinary income tax and can save you a lot of money if the value of the stock is likely to increase over time.

For example, pretend you are granted 100 restricted shares valued at $.01 per share that vest in one year and elect to file an 83(b) election: your taxable income is only $1.00. Now pretend it is a year later and these shares are fully vested and are now worth $1 per share: your taxable income would be $100 if you chose not to file an 83(b) election. Note: Section 83(b) election is only effective if it is filed with the IRS within 30 days of the date the person acquires the equity that is subject to vesting.

Synonyms:
83(b) Election