Net Unrealized Appreciation (NUA) — definition & guide

A tax treatment for employer stock held inside a 401(k) that lets the account owner pay ordinary income tax on the cost basis at distribution and capital gains tax on the appreciation when the shares are later sold.

Net Unrealized Appreciation is a special rule under IRC Section 402(e)(4) for employer securities in a qualified retirement plan. On a lump-sum distribution triggered by a separation-from-service, death, disability, or age 59 1/2 event, the employee pays ordinary income tax only on the cost basis (what the plan paid for the shares). The unrealized appreciation, NUA, is taxed at long-term capital gains rates when the shares are later sold, even if sold the same day. Post-distribution appreciation is taxed as capital gain based on the post-distribution holding period.

Example: an employee retires with $2 million of employer stock in her 401(k), $300,000 of cost basis. She takes an NUA distribution: $300,000 is taxed as ordinary income, $1.7 million is deferred as NUA. On sale one year later at $2.1 million, the $1.7 million NUA is long-term capital gain plus a $100,000 short-term gain on post-distribution appreciation.

Common mistake: rolling employer stock to an IRA, which permanently forfeits NUA treatment. The entire account becomes ordinary income at distribution.

NUA matters at retirement from a company with heavy employer stock in the 401(k), typically legacy tech and industrial employers.