Net Unrealized Appreciation (NUA)
The difference between the cost basis and current market value of employer stock held in a retirement plan, which may qualify for preferential long-term capital gains tax treatment.
What is NUA?
Net unrealized appreciation (NUA) is a tax strategy that applies when an employee takes a lump-sum distribution of employer stock from a 401(k) or other qualified retirement plan in kind (as shares, not sold for cash). Rather than rolling the shares into an IRA — where all future distributions are taxed as ordinary income — the employee can elect NUA treatment. Under this strategy, the original cost basis of the shares is taxed as ordinary income in the year of distribution; however, the NUA (the gain above cost basis accumulated inside the plan) is taxed at the lower long-term capital gains rate when the shares are eventually sold, regardless of how long the shares are held afterward. This can produce significant tax savings for employees who accumulated highly appreciated company stock inside their retirement plans.
Example
An employee has $300,000 of company stock in her 401(k) with a cost basis of $50,000 (NUA = $250,000). She takes a lump-sum distribution in-kind. She pays ordinary income tax on the $50,000 basis. When she sells the shares later, the $250,000 NUA is taxed at the 15% long-term capital gains rate rather than her 32% ordinary income rate — saving approximately $42,500 in federal taxes.
Source: IRS — Net Unrealized Appreciation (NUA) in Employer Securities