I faced the same issue in my 2023 return that I'm working on now. I know the 1099-R did treat the cost basis as orginary income and applied no tax to the appreciated stock, so that leaves the 1099-B stock entery to handle the appreciation at time of distribution to get the more favorable LT capital gains as you mention, then do a second entry for any additional appreciation post distribution (didn't sell it right away) as short term capital gains (assuming It's sold in that tax year, which is what we're doing). You are basically changing the cost basis to make the appreciation match the correct dollar amount which should be the value of the stock at time of distribution. I will try that, but it would be great if we heard back if the IRS was ok with that approach.
It's also my understanding that NUA In-Kind disctribution like this from the 401K are not subject to the NIIT (3.8%) tax. How does Tubotax handle that if say your stock is above that number, say in the range of 400 to 500K. Is NIIT not applied to the LT gains, but is applied to any additional appreciatioin in the short term capital gains. Do I have access or at least visiblity into Form 8960 to see how Turbo Tax is treating NIIT and the sale of this stock. My 1099-B indeed only showed my date of sale, proceeeds and number or shares. The cost basis and date acquired were unknown. I had to obtain the cost basis from the 401K custodian and it was in a total value for the funds with no break down of purchase dates other than it was elibable for NUA and In-Kind distributions. As an example the cost basis might be 49K (taxed at ordinary income), the distributibuted value might be 400K (400 - 49K taxed at LTCG) and it might of appreciated another 20K which is treated as short turm capital gains, Then comes MAGI numbers and now NIIT will be calculated since the IRS says NUA is not subject to NIIT tax. I'm assuming the addition 20K of appreciation might be. I'd welcome clarification on the IRS read here as well as making this all work in Turbo Tax.
