When it comes to equity compensation, most people hear about stock options or RSUs. But there’s another type of award that shows up, especially at early-stage startups: Restricted Stock Awards (RSAs). If you’ve received RSAs — or you’re considering filing an 83(b) election — it’s important to understand how they work and what they mean for your taxes
What Are RSAs?
An RSA is a grant of company stock that you own right away, but with restrictions attached. Usually, those restrictions are based on a vesting schedule. If you leave the company before you’re fully vested, you might forfeit the unvested shares.
Unlike RSUs, which deliver stock only when you vest, RSAs give you actual shares on day one — you just can’t fully call them yours until you meet the vesting conditions.
Taxes and RSAs
Here’s the key part: RSAs are taxable when they vest.
- At vesting, the fair market value (FMV) of the shares is considered ordinary income, reported on your W-2 (if you’re an employee).
- Your cost basis becomes the FMV at vesting.
- From there, when you sell the shares, any additional gain (or loss) relative to the cost basis is treated as a capital gain.
This can create a challenge: if your shares aren’t liquid (can’t be sold), you could face a tax bill without cash to cover it. That’s where the 83(b) election comes in.
What Is an 83(b) Election?
An 83(b) election is a special tax election you can file with the IRS within 30 days of receiving your RSA grant. It lets you choose to pay taxes up front, when the shares are granted, instead of waiting until they vest.
Here’s why that can matter:
- If you file an 83(b), you pay ordinary income tax on the current value of the shares at grant (often very low for early-stage companies).
- Once you’ve paid, your future gains are treated as capital gains when you eventually sell the stock.
- Your holding period for long-term capital gains starts on grant date.
If you don’t file an 83(b):
- You’ll pay ordinary income tax on the value of the shares at each vesting date.
- If your company’s valuation rises significantly, that could mean a much bigger tax bill later.
Example
Imagine your company grants you 10,000 RSA shares at a value of $0.10 each ($1,000 total).
- If you file an 83(b):
- You report $1,000 of ordinary income now.
- Years later, if the shares are worth $10 each and you sell, your gain is treated as long-term capital gains.
- If you don’t file an 83(b):
- You’ll owe ordinary income tax on the value at vesting. If the shares are worth $10 at vest, that’s $100,000 of income — even before you sell.
Risks of Filing an 83(b)
The 83(b) election isn’t always the right choice. If you file and then leave the company before vesting, you’ll have paid taxes on shares you no longer own. Similarly, if the company’s value never grows or the shares become worthless, you won’t get your tax payment back.
Key Takeaways
- RSAs give you actual stock on day one, but restrictions (like vesting) apply.
- 83(b) elections let you pre-pay taxes at grant, which can be a smart move if your company’s valuation is low and you expect growth.
- Timing is everything. You only have 30 days from your RSA grant to file an 83(b). Miss the window, and you can’t go back.
- There’s risk involved. Paying tax upfront makes sense only if you’re confident in the company’s future and your own vesting.
RSAs and 83(b) elections can be powerful tools for managing equity, but they’re also technical, and the stakes are high. Filing (or not filing) an 83(b) could dramatically change your tax bill years down the line.
If you’ve received RSAs, don’t go it alone. Talk with a tax advisor to evaluate your personal situation and decide whether an 83(b) is the right move.
