Net unrealized appreciation

Key points

• Net unrealized appreciation, or NUA, is generally the increase in employer securities’ value while the employer plan held them. Qualifying NUA can be deferred until sale and taxed as long-term capital gain.
• The usual lump-sum route requires a qualifying event and distribution of the entire balance from the employer’s plans of the same kind within one taxable year. A large check alone does not meet that definition.
• The stock leaves the plan as shares, not sale proceeds, and stays outside an IRA. The taxable plan cost is generally ordinary income in the distribution year; later growth has separate rules.
• Rolling the stock or its proceeds into an IRA gives up the special NUA treatment for later IRA payments. That is a tax trade-off, not a reason to keep a concentrated stock position.

The question is not simply whether capital-gain rates are lower than ordinary-income rates. It is whether the distribution qualifies, what tax is due now, and what happens to the shares afterward. The IRS’s employer-securities rules separate those issues.

This guide covers the common case of appreciated employer stock in a non-Roth qualified employer plan. Designated Roth stock, employee after-tax contributions, inherited benefits and older special lump-sum elections need additional analysis. For the wider destination choices, see the 401(k) rollover guide.

What is net unrealized appreciation?

NUA is not the stock’s whole market value. It is generally the difference between the securities’ value when distributed and the plan’s cost of acquiring them. The plan administrator supplies the cost and NUA information. An investor’s estimate of an old share price is not a substitute for those records. IRS Publication 575

Three amounts matter:

Amount	What it measures	General treatment in a qualifying case
Plan cost	The plan’s cost of the distributed stock	Ordinary income on distribution, except for recoverable employee after-tax basis
NUA	Appreciation inside the plan	Deferred until sale, then long-term capital gain to the extent realized
Later gain	Appreciation after distribution	Short-term or long-term gain based on the post-distribution holding period

The special rule concerns employer securities distributed from the plan. It is not a general tax election for every stock or fund held in a 401(k). Selling the employer shares inside the plan and distributing cash does not deliver employer securities eligible for this treatment. IRC section 402(e)(4)

Which distributions qualify for NUA treatment?

For the lump-sum route, the IRS defines a lump-sum distribution as the distribution, within a single tax year, of the participant’s entire balance from all of the employer’s qualified plans of one kind: pension, profit-sharing or stock bonus. It is not necessarily one payment. It is also not a requirement to empty unrelated employers’ plans or personal IRAs. IRS Topic 412

The balance must become payable under a qualifying condition:

• The participant dies.
• The participant reaches age 59 and a half.
• An employee separates from service.
• A self-employed participant becomes totally and permanently disabled.

The distinction between employee separation and self-employed disability is in the statutory definition. Disability is not an interchangeable trigger for every participant. IRC section 402(e)(4)(D)

A current employee reaching age 59 and a half has a potential qualifying event, not an instruction forcing the plan to release stock. The plan’s distribution provisions still matter. Ask the administrator to identify the permitted distribution and all plans included in the same-kind aggregation.

The law separately preserves certain NUA attributable to employee contributions outside the full lump-sum route. That exception does not turn an arbitrary partial withdrawal into a qualifying distribution of all employer-funded appreciation. This guide’s example assumes no employee after-tax basis and satisfaction of the lump-sum conditions. Publication 575, distributions of employer securities

How does the one-tax-year requirement work?

The assets counted in the lump-sum test need to leave the relevant plans within one taxable year. A transaction can send stock in kind to a taxable account and other eligible assets by direct rollover to an IRA. Publication 575 allows a direct rollover of part of an eligible distribution; the stock kept outside that rollover still has to satisfy the separate NUA conditions. IRS Publication 575

For a calendar-year taxpayer, a final portion paid in January belongs to a different tax year from a December payment. That creates a problem for a distribution intended to satisfy the single-year test. This is a tax-year rule, not the ordinary 60-day rollover deadline. The 60-day rollover guide addresses that separate clock.

The distribution history matters as well as the intended final transaction. Give the tax professional reviewing eligibility the dates of earlier withdrawals, the triggering event and each plan’s remaining balance. A statement that one account is empty does not establish that all plans counted under the rule are empty.

Before authorizing movement, a written transaction outline can identify:

• The triggering event and its date.
• Which employer plans count together.
• Which shares will be distributed in kind, their plan cost and their current value.
• Where the stock and the other eligible assets will go.
• How the administrator will confirm completion within the intended tax year.

This is a coordination checklist, not a conclusion that the transaction qualifies. Unresolved distribution history or missing cost records are reasons the NUA result cannot yet be calculated reliably.

How are the stock and its later sale taxed?

In the common pre-tax example, the plan cost is included in ordinary income when the shares leave the plan. Qualifying NUA is excluded then. When the shares are sold, gain up to the excluded NUA is long-term capital gain even if the shares were sold soon after distribution. Appreciation after distribution uses its own holding period, measured after the distribution. Publication 575

That distinction is important when a sale happens within a year. The original NUA and the newer gain can have different tax character on the same sale. If the value falls instead, the amount of gain actually realized can be less than the recorded NUA. A tax return needs the sale proceeds and basis, not merely the NUA figure copied from a statement.

What about the early-distribution tax?

Before age 59 and a half, the taxable portion of a plan distribution can also face the 10% additional tax unless an exception applies. The excluded NUA is not part of the amount included in income at distribution. In the example below, an otherwise applicable additional tax would be tested against the taxable plan cost, not the full stock value. Publication 575

The separation-from-service exception generally applies when an employee leaves during or after the calendar year of turning 55. It does not carry over to IRA distributions. Reaching an NUA qualifying event and qualifying for an early-distribution exception are separate tests. See the rule of 55 and the IRS exceptions table.

What about net investment income tax?

The regulation excludes the qualifying NUA realized on the later sale from net investment income. It does not extend that exclusion to appreciation after distribution or dividends received after the shares leave the plan. Those amounts enter the net-investment-income analysis; whether tax is actually due depends on the taxpayer’s other circumstances. 26 CFR section 1.1411-8(b)(4)

NUA example: separate the three amounts

Assume a participant aged 62 satisfies the lump-sum requirements, has no employee after-tax basis, and receives employer shares worth $120,000 with a $30,000 plan cost. The participant later sells all the shares for $140,000, more than a year after distribution.

For illustration only, assume a 24% ordinary-income rate on the taxable plan cost and a 15% long-term capital-gain rate on both gains. These are assumed marginal rates, not a calculation of the participant’s tax brackets. Ignore state tax, net investment income tax, transaction costs and other income-related effects.

Component	Calculation	Illustrative federal tax
Taxable plan cost at distribution	$30,000 x 24%	$7,200
NUA realized on sale	($120,000 − $30,000) x 15%	$13,500
Gain after distribution	($140,000 − $120,000) x 15%	$3,000
Total across distribution and sale	$7,200 + $13,500 + $3,000	$23,700

The NUA is $90,000. The later gain is $20,000. The $23,700 total is spread across the relevant tax years; it is not all due when the stock leaves the plan.

Change the sale to eight months after distribution, keep the same sale price, and assume the newer gain is taxed at the same 24% ordinary rate. Tax on that $20,000 becomes $4,800, and the combined illustration becomes $25,500. The original $90,000 NUA keeps its long-term treatment. Actual rates depend on the return for each year.

For a different participant below age 59 and a half, with no applicable exception, a 10% additional tax on the same $30,000 taxable distribution would add $3,000. That addition is excluded from the age-62 example.

These calculations explain tax character. They do not compare lifetime wealth under NUA and an IRA. Such a comparison also needs the timing of sales and IRA withdrawals, investment returns, tax paid from outside funds and future tax rates.

What changes if the shares go to an IRA?

A rollover to a traditional IRA generally preserves retirement-account tax deferral for the eligible pre-tax amount. A rollover of pre-tax money to a Roth IRA is generally taxable instead. Neither IRA route preserves separate NUA capital-gain treatment for later IRA payments. The IRS’s employer-stock explanation specifically says that after a rollover the special rule does not apply to subsequent IRA payments. Notice 2026-13, non-Roth safe-harbor explanation

That is why the decision comes before the rollover, not when the stock is eventually sold inside the IRA. Keeping the same shares does not keep the old plan-level tax character. The broader rollover IRA guide explains the destination.

NUA treatment also means moving the selected shares outside the retirement wrapper and recognizing the taxable cost now. The shares still expose the holder to changes in that company’s value. Holding them merely to defer a sale is a separate investment decision, not a requirement for long-term treatment of the original NUA.

A useful comparison therefore includes the size of the taxable cost, the stock concentration, the cash available for tax and the intended sale date. No single cost-basis percentage in this guide establishes which route produces a better outcome.

What records belong in the NUA file?

Keep the administrator’s calculation of plan cost and NUA, the distribution valuation, the full distribution history, transfer confirmations and subsequent sale records. The custodian’s display alone may not explain which portion of gain came from inside the plan and which arose afterward.

Ask how the administrator will report the distribution and how the tax preparer will reconcile that report with the sale. Where employee after-tax contributions exist, obtain those records too. Publication 575 treats recoverable employee cost separately from the taxable amount. IRS Publication 575

The direct rollover guide covers moving the remaining eligible assets. Neither a routine rollover form nor a successful delivery of shares certifies that the separate NUA conditions were met.

About this guide

Written by the Diversify Guy editorial desk. Diversify Guy is a pen name. It is the byline of our editorial team, not a single individual. We do not publish personal trading records or claim to be your adviser. We tell you where every figure came from so you can check it yourself. How we work and how we get paid.

This guide explains federal tax rules. It is not personalized tax or investment advice.

Sources and check dates

Checked November 3, 2026. Worked figures are hypothetical, independently calculated with Decimal and retained with the source evidence.

• IRS Publication 575, pension and annuity income, employer securities, lump-sum distributions and early-distribution tax.
• IRS Topic 412, lump-sum distributions.
• IRC section 402, particularly subsection (e)(4).
• 26 CFR section 1.1411-8, qualified-plan distributions and employer securities.
• IRS early-distribution exceptions.
• IRS Notice 2026-13, non-Roth employer-stock explanation and the plan-versus-IRA early-distribution rules.