How to Report NUA on Your Tax Return Properly

Net Unrealized Appreciation (NUA) offers significant tax advantages when handling employer stock distributions from a retirement plan. If reported correctly, it allows you to pay lower capital gains taxes on the appreciation rather than ordinary income tax rates. However, mistakes in reporting can lead to unnecessary tax liabilities or missed savings opportunities.

Properly reporting NUA requires understanding which distributions qualify, how to allocate cost basis, and where to enter the information on your tax return.

Determining Which Distributions Qualify

To qualify for NUA tax treatment, the distribution must be a lump-sum withdrawal of the entire retirement account balance within a single tax year. This includes all assets in the plan, not just employer stock. A partial distribution disqualifies the stock from NUA treatment, meaning the entire amount is taxed as ordinary income.

The IRS requires that the distribution follow a triggering event: separation from service (except for self-employed individuals), reaching age 59½, disability (for self-employed individuals), or death. If none of these events apply, the distribution does not qualify for NUA tax benefits. Additionally, the stock must be distributed in-kind, meaning the shares are transferred directly rather than sold for cash within the retirement account. Selling the shares before distribution eliminates the opportunity for NUA treatment.

Allocating Cost Basis and NUA

The cost basis of employer stock is the original purchase price, typically recorded by the plan administrator. This determines how much of the distribution is taxed as ordinary income. When the shares are distributed, only the cost basis is immediately taxable, while the NUA—the increase in value from purchase to distribution—remains untaxed until the stock is sold.

Taxpayers can choose how much of the cost basis to roll into an IRA to defer taxation versus taking the full distribution to maximize the NUA benefit. The IRS allows selecting specific shares for distribution, so prioritizing those with lower cost bases can reduce immediate tax liability. Keeping detailed records of each share’s cost basis ensures accurate tax reporting.

Once distributed, the NUA is locked in and taxed at long-term capital gains rates when sold, regardless of how long the shares are held. Any additional appreciation beyond the NUA is subject to standard capital gains treatment—short-term if sold within a year, long-term if held longer. Tracking post-distribution gains is necessary for accurate tax reporting.

Applying Capital Gains Rates

When selling employer stock that qualified for NUA treatment, the tax rate depends on how long the shares are held after distribution. The NUA portion is always taxed at long-term capital gains rates, which in 2024 are 0%, 15%, or 20%, depending on taxable income. Any additional appreciation after distribution follows standard capital gains rules—short-term if sold within a year, long-term if held longer.

Strategic timing of stock sales can reduce tax liability. In 2024, the 0% capital gains rate applies to single filers with taxable income up to $47,025 and married couples filing jointly up to $94,050. If income is expected to decrease in future years, delaying the sale could result in a lower tax rate. Donating shares to charity instead of selling can also eliminate capital gains taxes while providing a deduction for the stock’s fair market value.

Documenting Employer Stock Transactions

Accurate record-keeping is essential for tax compliance. Key details to track include the date of distribution, the fair market value of the shares at transfer, and any subsequent sales. This ensures that additional appreciation beyond the NUA is correctly categorized when the stock is sold.

Brokerage firms may not always distinguish between the original cost basis and the NUA portion, so taxpayers should verify that their brokerage account reflects these amounts separately. If discrepancies arise, supporting documents such as employer plan statements, Form 1099-R, and transaction confirmations should be reviewed and retained. Proper documentation prevents misreporting taxable amounts and ensures the correct tax treatment of each sale.

Entering Data on Federal Return

Reporting NUA on a federal tax return requires correctly entering information from Form 1099-R, which details the distribution amount, taxable portion, and NUA. Ensuring these figures are accurately transferred prevents misclassification that could increase tax liability.

On Form 1040, the ordinary income portion—typically the cost basis of the employer stock—is reported on line 5b as taxable pension income. The NUA amount is not included in this section but must be tracked separately for future capital gains reporting. When the stock is sold, Schedule D and Form 8949 are used to report the sale proceeds, the NUA portion as long-term capital gains, and any additional appreciation based on the post-distribution holding period. If the brokerage statement does not separate these amounts, taxpayers must manually adjust the cost basis to reflect the correct tax treatment. Keeping detailed records ensures accurate reporting and prevents IRS scrutiny.