Net unrealized appreciation lets company stock leave a 401(k) with at most its cost basis taxed as ordinary income, and growth taxed later as capital gain.
What is net unrealized appreciation on company stock?
Many 401(k) plans hold the employer's own stock. Net unrealized appreciation is the rise in those shares' value inside the plan: their market value on the day they are distributed, minus the plan's cost basis in them.
Money paid out of a 401(k) is generally taxed as ordinary income. Section 402(e)(4) of the tax code makes an exception for employer stock. When the shares come out in kind as part of a lump-sum distribution, the NUA is left out of that year's income and taxed when you sell. Stock of your employer's parent or subsidiary corporation counts too.
- Cost basis
- What the plan paid for the shares. Under the NUA rules, it is taxed as ordinary income in the year the shares come out, except any part that came from your own after-tax contributions.
- In kind
- Paid out as the shares themselves, into a regular taxable brokerage account, instead of sold inside the plan for cash.
NUA is the gap between what the plan paid for your company shares and what they are worth on the day they leave the plan.
How is company stock taxed under the NUA rules?
| Piece of the value | When it is taxed | How it is taxed |
|---|---|---|
| Cost basis | The year the shares are distributed | Ordinary income, less any after-tax contributions you made toward the shares |
| NUA (growth inside the plan) | When you sell | Long-term capital gain, however soon you sell |
| Growth after the distribution | When you sell | Long-term or short-term, based on how long you held the shares after they left the plan |
IRS Publication 575 says any gain up to the amount of the NUA is long-term capital gain, so you do not have to hold the shares for a year after the distribution to get that treatment. You can also elect, on that year's return, not to use the exclusion; the NUA is then taxed as ordinary income that year too.
For the 2026 tax year, long-term capital gains are taxed at 0% on gains that fit within taxable income up to $98,900 for married couples filing jointly ($49,450 single), at 15% up to $613,700 ($545,500 single), and at 20% above that. These figures change every year, so confirm the current numbers before acting. A lower-income year, such as early retirement, may let part of the gain fall in the 0% capital gains bracket.
With NUA, the plan's cost basis (less any after-tax contributions) is taxed now as ordinary income, and the growth inside the plan waits until you sell to be taxed as long-term capital gain.
Does the 10% early distribution tax apply?
For the shares, when you use the NUA exclusion, only to the taxable part of the cost basis. Section 72(t) adds a 10% tax to the part of an early distribution included in gross income; the NUA and any return of your after-tax contributions are not included. The tax does not apply once you are 59½, and Publication 575 lists other exceptions, including distributions after you separate from service in or after the year you reach age 55.
Does the 3.8% net investment income tax apply?
Not to the NUA. Treasury regulations treat NUA realized on a sale as a retirement plan distribution, which the surtax excludes. Growth after the distribution, and dividends paid once the shares leave the plan, are net investment income. For the 2026 tax year, the surtax applies only above modified adjusted gross income of $250,000 for joint filers and $200,000 for single filers. The NUA gain still counts in adjusted gross income, so a large sale can push other investment income over that line.
What counts as a lump-sum distribution?
Full NUA treatment requires a lump-sum distribution. Under 26 U.S.C. 402(e)(4)(D), that is your entire balance, paid within one tax year, after one of these events:
- Your death (paid to your beneficiary)
- Reaching age 59½
- Separating from service, if you are an employee
- Becoming totally and permanently disabled (as section 72(m)(7) defines it), if you are self-employed
All of the employer's plans of the same kind count as one: its profit-sharing plans together, its pension plans together, its stock bonus plans together. If the distribution is not a lump sum, only the NUA tied to your own after-tax contributions is excluded.
The whole balance does not have to land in a taxable account. IRS guidance lists rolling over all or part of a lump-sum distribution as an option, so the company shares can go to a brokerage account while the rest goes to an IRA by direct rollover in the same tax year. Plan procedures vary, so settle the order of steps with the plan administrator first.
The whole balance has to come out within one tax year, but only the company shares need to go to a taxable account.
NUA or an IRA rollover: what are the tradeoffs?
The alternative is to roll everything, shares included, into an IRA. Nothing is taxed at the rollover, but withdrawals from a traditional IRA, growth included, are ordinary income apart from any after-tax basis you rolled in (see how to reduce taxes on IRA withdrawals).
A hypothetical shows how the pieces fall. Assume a 62-year-old who has retired from the employer holds company stock worth $1,000,000 in the plan, with a cost basis of $200,000 and no after-tax contributions. These numbers are illustrative only.
| Item | Shares taken out in kind (NUA) | Shares rolled to an IRA |
|---|---|---|
| Taxed in the distribution year | The $200,000 cost basis, as ordinary income | Nothing, in a direct rollover |
| The $800,000 of NUA | Long-term capital gain when sold | Ordinary income when withdrawn |
| Growth after the distribution | Capital gain when sold | Ordinary income when withdrawn |
| Required minimum distributions | Do not apply to a taxable account | Apply under the usual rules |
Which side comes out ahead depends on facts no rule of thumb settles:
- Basis compared with value. A low basis leaves more of the value taxed at capital gains rates. A high basis leaves little NUA for the upfront tax to buy.
- Cash for the upfront tax. Tax on the basis is due for the distribution year, so know where that money will come from.
- Concentration. The NUA rule does not require holding the stock, since gain up to the NUA is long-term even on a quick sale.
- The rest of your income plan. When the shares are sold, and over how many years, shapes the capital gains rate and how the sale fits with Social Security, required minimum distributions and other retirement income streams.
Once company shares are rolled into an IRA, NUA treatment is gone for good.
How do you check whether NUA fits?
Start by asking the plan for the cost basis and current value of your company shares; after the distribution, the NUA appears in box 6 of Form 1099-R. Then confirm which qualifying event applies, which plans must be emptied in the same tax year, and what the tax on the basis would be. Anchor provides tax strategy, planning and coordination, not tax filing or legal advice. Talk with your CPA and advisor about your situation before anything is distributed, and see how to coordinate your CPA, advisor and attorney.
Frequently asked questions
Do I have to hold the shares for a year to get capital gains treatment on the NUA?
No. Gain up to the amount of the NUA is long-term capital gain whenever you sell. Only gain above the NUA depends on how long you held the shares after the distribution.
Can I roll the rest of my 401(k) to an IRA and still use NUA on the company stock?
Yes, if the distribution otherwise qualifies as a lump sum. IRS guidance lists rolling over all or part of a lump-sum distribution as an option, and the special rule applies to employer stock you do not roll over. Any shares placed in the IRA lose NUA treatment.
Is NUA subject to the 3.8% net investment income tax?
The NUA itself is not. Growth after the distribution, and dividends paid after the shares leave the plan, are net investment income.
What happens if my distribution is not a lump sum?
Only the NUA tied to your own after-tax contributions is excluded. The NUA from employer contributions is taxed as ordinary income in the distribution year.
Sources
- 26 U.S. Code § 402 (Cornell LII), the NUA exclusion and election in 402(e)(4)(A) and (B), and the lump-sum definition and plan aggregation in 402(e)(4)(D).
- 26 CFR § 1.402(a)-1 (Cornell LII), how NUA is measured and taxed on a later sale.
- IRS Publication 575 (2025), Pension and Annuity Income, NUA holding period, how after-tax contributions are recovered, Form 1099-R box 6, and the 10% tax and its age 55 exception.
- IRS Topic No. 412, Lump-sum distributions, qualifying events and rolling over all or part of a lump sum.
- IRS Notice 2020-62, safe harbor explanation for eligible rollover distributions, the special rule for employer stock not rolled over, and its loss once the stock is rolled over.
- 26 U.S. Code § 72(t) (Cornell LII), the 10% additional tax on early distributions and the disability definition in 72(m)(7).
- 26 U.S. Code § 1411 (Cornell LII), the 3.8% surtax, its thresholds, and the qualified plan exclusion.
- 26 CFR § 1.1411-8 (Cornell LII), NUA treated as a plan distribution; later growth and dividends as net investment income.
- IRS Revenue Procedure 2025-32, section 3.03 (Internal Revenue Bulletin 2025-45), 2026 long-term capital gains rate thresholds.
This article is for educational purposes only and does not constitute financial, tax, or legal advice. Anchor Financial Group is a registered investment adviser; investing involves risk, including the possible loss of principal, and past performance does not guarantee future results. Consult a qualified advisor about your specific situation.
