https://www.irs.gov/taxtopics/tc412#:~:text=Net%20Unrealized%20Appreciation,-If%20the%20lump%2Dsum
*under the assumption the taxpayer elected not to include the NUA in the income in the year the securities were distributed.
NUA is a special tax treatment that relates to distributions of appreciated employer securities from an eligible employer-based retirement plan as a part of a qualifying lump-sum distribution.
The taxation of the securities is based on the cost basis of the securities and the amount that they have appreciated while in the plan.
The cost basis of the securities that are distributed in-kind will be taxed at ordinary income tax rates when you take a qualifying lump-sum distribution that includes appreciated employer securities. It will be taxed in the year you take the distribution from the plan. A 10% premature distribution penalty may apply.
- Taxation of the appreciation, the NUA, following a lump-sum distribution is deferred until the employer securities are sold or disposed of.
When securities are sold, any NUA is taxed at the long-term capital gains rate. Any additional gain is taxed based on the holding period of the securities after they are distributed.
You can elect not to use the NUA tax strategy.
NUA is not available and is irrevocably forfeited if the employer securities are rolled into an IRA.
TurboTax does not have a native interview for the securities sold under NUA. The customer will receive a 1099-B with cost basis $0.
If the stock was hold for more than 1 year in the brokerage account the entire amount can be entered as per 1099-B, box "cost basis is incorrect or missing on my 1099-B" checked, and cost basis = cost basis of the stock in 401K (box 2 of the 1099-R)
For stock hold for less than 1 year, sale has to be broken in two pieces in order to tax the NUA as long term capital gain:
One part for the long term capital gain of NUA:
Second part for the consecutive appreciation of securities, long-term or short-term capital gain/loss, depending on the holding period of the securities in the hands of the distribute.
For the Net gain/loss realized in the sale – complete first part of the interview based on the information form 1099-B (cost basis = 0)
The box "cost basis is incorrect or missing on my 1099-B" checked
Cost basis = NUA
The result will be capital gain/loss equal to the difference between the net unrealized appreciation at the time of distribution and the market value at the time of selling the stock.
