I have received stock this year as part of an NUA (Net Unrealized Appreciation) 401(k) distribution. The stock has gained value from the date of the distribution which means I owe taxes for both Long and Short Term for each share sold this year.
How do I report both LT & ST gains for a single sale in TurboTax?
Shares distributed in-kind from retirement accounts are often (perhaps always) recorded the broker as uncovered shares, so there's a good chance that the broker will not report a cost basis for these shares. They might also report these shares as having an unknown holding period.
Ultimately your tax return must report the correct dollar amounts of LT and ST gains. One way (perhaps the only way) to do that would be to enter each share twice as you suggest, LT with the sales proceeds equal to the value on the date of distribution from the 401(k) (the share value reflected on the Form 1099-R) and the actual cost basis (also determined from the Form 1099-R by subtracting the NUA from the share value) and again as ST with the sales proceeds equal to the value on the date of the sale and a cost basis equal to the value on the date of the distribution. It's the method that I thought of independently before seeing that you had suggested the same thing.
Using this method with your example, yes, you would report a LT sale of $100 with $50 of cost basis and a ST sale of $110 with a cost basis of $100, resulting in $50 of LT gain and $10 of ST gain on Schedule D as you indicated. My only concern is whether the reporting on Form 8949 which will show what the IRS expects to see under these circumstances. I would probably include an explanation statement with my tax return describing this sale and why the sale appears twice on From 8949. I have not been to find any guidance from the IRS on how to report this.
The sale must be split between long and short term which should be reported on the 1099-B from the broker in February of next year. Ask the broker how they will report it ... ask them to explain it to you.
Say it's 100 shares sold at $110 and the NUA Distribution Basis is $50 with a NUA distribution day price of $100. That is a LT gain of $60 and a ST gain of $10 per share.
If you are not familiar with NUA, each of the individual shares have a dual LT and ST capital gain/loss for the first year after the NUA distribution. (Assuming a price change +/- from the UA distribution day price when sold.)
So it would be reported as this?
100 @ $110 basis $50 as Long Term
and
100 @ $110 basis $100 as Short Term
The NUA reported on the 1099-R is informational only ... what did you do with the stock? Sell or roll ?
Did you roll it to a regular broker account ? Or an IRA?
What does the 1099-R look like ? What code is in box 7? Is the taxable amount in box 2a the same as box 1 & 6 ? Did you get a lump sum ?
1099-R instructions:
Box 6. If you received a lump-sum distribution from a qualified plan
that includes securities of the employer’s company, the net unrealized
appreciation (NUA) (any increase in value of such securities while in
the trust) is taxed only when you sell the securities unless you choose
to include it in your gross income this year. See Pub. 575 and
Form 4972. If you roll over the distribution to a designated Roth
account in the same plan or to a Roth IRA, see the instructions for box
2a. For a direct rollover to a designated Roth account in the same plan
or to a Roth IRA, the NUA is included in box 2a. If you didn’t receive a
lump-sum distribution, the amount shown is the NUA attributable to
employee contributions, which isn’t taxed until you sell the securities.
I have received the NUA distribution in stock -- it was not a rollover. I plan to sell some stock shortly.
I do not have an issue with the 1099-R. That is pretty straight foreward and can be accommodated in TurboTax.
The NUA numbers are large as it related to regular income. I must now pay in Estimated Payments and to raise those funds, I must sell some of the stock.
I just want to know how to report a stock sale to the IRS. (Remember that I said that the sale will have both LT and ST cap gains of each share I sell in 12 month after my NUA distribution.) Right now I am modeling in TurboTax 2019 to understand the potential tax so I can make an estimate payment -- thus the sale. A secondary reason is to understand if TurboxTax can handle this stock sale situation.
Ok ... so the stock was moved to the broker's account and they issued a 1099-R form ... the taxable portion of box 1 will be in box 2a and that is how you pay the short term taxes then all of the stock sold will all be long term sales reported on a Sch D ... https://ttlc.intuit.com/community/taxes/discussion/where-do-i-report-closing-401k-and-moving-stock-o-a-non-qualified-brokerage-account-to-take-an-nua/00/312001
You'll enter the Form 1099-R reporting this distribution. Enter the Form 1099-R under Wages & Income -> Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R).
The Form 1099-R will have the gross distribution in box 1, the taxable amount in box 2a, tax withholding in box 4, any after-tax basis included in the distribution in box 6, the NUA amount in box 6, and code 1, 2 or 7 in box 7 (depending on your age at distribution and your age at separation from service). The taxable amount in box 2a will be the amount in box 1 minus the amounts in boxes 5 and 6 (but not less than zero).
Be sure to keep track of the NUA amount and the basis in the NUA shares for use when you eventually sell the shares since the brokerage might not retain that information.
1099-R is what I will receive for the taxable part of the NUA as regular income. This is pretty straight foreword.
1099-B is what I should receive for what stock I sell after the distribution. Again, if you read my example, a stock sale (assuming the stock price raises from the distribution day price) would have a LT cap gains based on my NUA basis and a ST gain on the delta of the sale price - distribution day price.)
How do I handle a stock sale with both LT and ST amounts (and different basis) in TurboTax?
How do I handle a stock sale with both LT and ST amounts (and different basis) in TurboTax?
The broker will breakdown the sales into ST & LT on the 1099-B based on the time you held the stock after the distribution. Each share of stock will have a cost basis that you have already paid taxes on it in the year of distribution. One share of stock sold cannot be both short and long term at the same time(or broken out by percentages).
So say you have 100 shares in company stock to move and you originally bought 10 shares (@$10 each ) and are taxed on those 10 shares at distribution (on the 1099-R) that means you now have 100 shares worth $1 each. So the cost basis in all those shares are $1 each.
So ... if you have 100 shares and you sell 10 before a year has passed then all 10 shares are considered short term sales. Then any stocks sold after one year are long term sales. If you broker doesn't break down the sales for you then you will need to do the math and enter the sales into the program manually.
Shares distributed in-kind from retirement accounts are often (perhaps always) recorded the broker as uncovered shares, so there's a good chance that the broker will not report a cost basis for these shares. They might also report these shares as having an unknown holding period.
Ultimately your tax return must report the correct dollar amounts of LT and ST gains. One way (perhaps the only way) to do that would be to enter each share twice as you suggest, LT with the sales proceeds equal to the value on the date of distribution from the 401(k) (the share value reflected on the Form 1099-R) and the actual cost basis (also determined from the Form 1099-R by subtracting the NUA from the share value) and again as ST with the sales proceeds equal to the value on the date of the sale and a cost basis equal to the value on the date of the distribution. It's the method that I thought of independently before seeing that you had suggested the same thing.
Using this method with your example, yes, you would report a LT sale of $100 with $50 of cost basis and a ST sale of $110 with a cost basis of $100, resulting in $50 of LT gain and $10 of ST gain on Schedule D as you indicated. My only concern is whether the reporting on Form 8949 which will show what the IRS expects to see under these circumstances. I would probably include an explanation statement with my tax return describing this sale and why the sale appears twice on From 8949. I have not been to find any guidance from the IRS on how to report this.
Can you give further information on how to actually do this in turbotax, ie enter both long term and short term gain? My 1099b from brokerage reported the entire amount as a long term gain. Using the example below, the 1099b would show 110 proceeds and no cost basis reported. I'm confused as to how to enter this since I want the proceeds to be 100 not 110. I assume that I would make an entry for the 1099B for the long term portion but don't know how to adjust the proceeds as I only see options for adjusting the basis. I'm also confused about which codes to use. It's not incorrect basis since no basis is recorded. Then for the short term sale (110-100), where would I report that? Do I enter and say no 1099B provided? Or do I do this manually sonehow in 8949? As for the explanation, do I have to submit my return by mail instead of electronically to include an explanation? Please provide further detailed instructions.
In the end, I just reported it as both a Long Term Gain and a Short Term Gain with the same dates and their respective gains. I had wanted to add a note but TurboTax would require me to file a with printed tax forms. I didn't -- I figured I had enough information in the filing to explain if I ever had an IRS problem.
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.
It sounds like you definitely want to work with the TurboTax desktop software so you can make adjustments directly at the forms level.
A lot of what you're dealing with here is beyond the scope of the software to deal with so if you are going to enter it yourself be careful. Consulting a tax professional is not the worst idea.
Thanks for the information. I was hoping someone from the 2020 post would reply if those suggestions worked on splitting the LT vs ST gains on a single stock but the suggestions seem logical. What's unique in my case is how the NIIT is applied. As I read the guidelines the IRS does not apply the NIIT tax to NUA "In-Kind" distribution from a 401K stock fund so I'll need to see how Turbo Tax handles form 8960. It appeared the 1099-R broke out the stock value at time of distribution that was over and above the cost basis. The cost basis indeed was handled as ordinary income (discussed before). So it looks like that is correct. Do I get any ability to even see how Turbo Tax "Online version" filled in Form 8960 wrt NIIT - is that hidden from me?
Am I to understand that if want to see form 8960 and potentially edit it (over-ride it) that I need to use the Desktop Version then?
Thanks for the detailed reponse as this is a unique case I beleive. The "advisor" I spoke to in Q4 said he's only dealt with this once in 30 years.
To further drill into details,
, that the earlier example did not mention NIIT (3.8%) since funds from the distribution were not over 250K in the example. I agree that I would need to be sure form 8960 is handling the NIIT tax correctly and if I can't see that form, and make edits if it's incorrect, then it sounds like the desktop version provides me that option. Is my understanding here correct?
Thanks again for the help.
Another thought:
Since I have significant time spent entering all my information into the "online version" I guess I could iterate in 100 dollar increments to see how that tax changes as I cross those MAGI thresholds, for example 250K for the NIIT tax. I can compare this to the calculations I expect and if it matches just finish with the "online version.
If turbo tax "online" is indeed wrongly applying the 3.8% NIIT tax on the 401K In-Kind distrupution, then every 100K over the 250K threshold will add an additional 3,800 to my taxes and I should see that.
If if the end result is what I do expect I don't have to start over entering everything into the "desktop version" of Turbo Tax. At a minimum I've learned more about the two versions of the software and educated myself on NUAs , 1099-R and 1099-B considerations for entering the cost basis, NUA distribution amt, and post distribution appreciation that can be handled with changing the cost basis and matching it to the 1099-B (that in my case didn't include a cost bases or any purchase dates which allows one to adjust those - a good thing). In a perfect world it would be nice if there were 2 1099-B forms, one for the distribution and one for the post distribution gain or loss.