Net Unrealized Appreciation (NUA): How the Tax Rule for Company Stock Works

If your 401(k) or other employer retirement plan holds shares of your company stock, a rollover to an IRA isn’t your only choice. A tax rule called net unrealized appreciation (NUA) can let part of the value be taxed at long-term capital gains rates instead of ordinary income tax rates.

This guide is for employees with highly appreciated employer stock in a workplace plan who are leaving a job, retiring, or reaching 59½. It explains the NUA rules, how the math works, and the trade-offs. Our 401(k) to IRA rollover guide covers the default rollover from a retirement plan.

Sources: IRS Publication 575, Internal Revenue Code section 402(e)(4), IRS Notice 98-24, Revenue Ruling 81-122, Treasury Regulation 1.1411-8, the Form 1099-R instructions, IRS Topic 409, and IRS news release IR-2025-103.

What is net unrealized appreciation (NUA)?

Net unrealized appreciation is the increase in value of employer securities while they were held in the plan’s trust. The Internal Revenue Service, in Publication 575, defines the NUA as “the net increase in the securities’ value while they were in the trust.”

Put simply, NUA is the current market value of the company stock when it leaves the plan minus its cost basis. If shares cost the plan $25 and are worth $130 at distribution, the NUA is $105 per share.

The Internal Revenue Code section that allows this is 402(e)(4), and the Internal Revenue Service explains it in Publication 575. The rule applies to employer securities only, not to mutual funds or other stocks held in the plan.

How highly appreciated employer stock builds NUA

Many employees collect employer stock through a company stock fund in the 401(k) or through matching contributions paid in shares. Over many years, that employer stock can rise far above what the plan paid for it. The bigger the gap between the cost basis and the market value, the more net unrealized appreciation (NUA) you have.

Employer securities that qualify

Pub 575 says the deferral applies to the employer corporation’s stocks, bonds, registered debentures, and debentures with interest coupons attached. The Form 1099-R instructions add securities of a subsidiary or parent corporation.

The employer securities must come out of the plan as shares. If the plan sells the employer stock and pays you cash, there are no employer securities distributed and no NUA to defer. Under Treasury Regulation 1.402(a)-1, other property leaves the plan at its fair market value, so ask how your plan values the shares on the distribution date.

Cost basis vs NUA

Your cost basis is generally what the plan paid for the employer stock. Pub 575 says cost includes the plan participant’s nondeductible contributions, any employer contributions already taxed to you, and some other items. Your plan administrator reports the NUA in box 6 of Form 1099-R. The form includes the NUA in the gross distribution in box 1 but not in the taxable amount in box 2a.

The cost basis and the NUA are taxed differently. That split is the whole point of an NUA strategy.

How NUA tax treatment works

Under the NUA rules, when you take a lump sum distribution that includes employer securities, three things happen.

The cost basis is taxed now. You pay ordinary income tax on the cost basis in the tax year of the distribution, at your ordinary income tax rates.

The NUA is taxed later. Tax on the net unrealized appreciation is deferred until you sell the shares. When you sell, the gain up to the NUA is long-term capital gain, no matter how long you held the shares after the distribution. Notice 98-24 and Revenue Ruling 81-122 confirm the long-term capital gains treatment, so NUA gets favorable capital gains rates even if you sell the stock immediately.

Later growth depends on your holding period. Any gain above the NUA is long-term only if you hold the shares more than one year after the distribution date. Otherwise it is short-term and taxed at ordinary income rates.

Pub 575 also lets you elect to include the NUA in income in the year of the distribution. In that case, the full value is ordinary income and nothing qualifies for capital gain treatment under the NUA rules.

Capital gains rates vs income tax rates

The tax benefits and tax advantages come from the gap between income tax rates and capital gains rates. The NUA is taxed at a lower capital gains rate than IRA withdrawals would be. Under IRS Topic 409, long-term capital gains are taxed at 0%, 15%, or 20%, depending on taxable income.

For 2026, IR-2025-103 says the top ordinary income tax rate is 37%, for single filers with income above $640,600 and married couples filing jointly above $768,700. Because the NUA is always long-term capital gains, you can sell the stock immediately or over several years and still get long-term capital gains rates on that part. Spreading sales across years can keep more of the gain at lower capital gains rates.

The difference between that top income tax rate and the 20% long-term rate shows why the NUA tax treatment can offer significant tax savings for shares with a low cost basis. Capital gains taxes on the NUA can be far smaller than the tax on the same dollars from a traditional IRA, and your total tax liability depends on your full taxable income.

Net Investment Income Tax

The 3.8% Net Investment Income Tax (NIIT) applies above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers. Under Treasury Regulation 1.1411-8, NUA you realize when you sell isn’t net investment income. Gain after the distribution is.

The lump sum distribution requirement

To defer tax on all of the net unrealized appreciation (NUA), you generally need a lump sum distribution from a qualified retirement plan. Pub 575 defines it as the distribution of a plan participant’s entire balance, within a single tax year, from all of the employer’s qualified plans of one kind. The kinds are pension, profit sharing, and stock bonus plans.

Under 402(e)(4)(D), all of an employer’s profit sharing plans count as one plan for this test, and the same goes for pension and stock bonus plans. So if you have two profit sharing plans with the same employer, both of the employer’s qualified plans must be emptied. The entire balance must leave all of them in the same tax year.

Qualifying triggering events

The Internal Revenue Service says the lump sum distribution must be paid because of one of these events, per Pub 575 and 402(e)(4)(D):

• The plan participant’s death.
• Reaching age 59½.
• Separation from service, for employees.
• Total and permanent disability, for self-employed people.

If the distribution isn’t a lump sum distribution, tax is deferred only on NUA from your own nondeductible employee contributions, not on the employer’s part.

When can you use net unrealized appreciation?

You can use NUA when you have a triggering event and your plan is a qualified plan that holds employer securities, such as a 401(k), profit sharing plan, or stock bonus plan. These qualified plans are employer sponsored retirement plans under section 401(a), and the NUA rules work only with qualified plans.

NUA doesn’t apply to stock in an IRA. Pub 575 says money rolled into a traditional IRA is ordinary income when you withdraw it. Once employer stock is rolled into that retirement account, the NUA tax treatment is gone. Section 402(e)(4) also doesn’t cover 403(b) plans or IRAs, so the tax benefits of the NUA rules stay limited to qualified plans.

Can I roll over my 401(k) with NUA?

Yes, in part. A common NUA strategy splits the lump sum distribution:

• Company stock and other employer securities go in kind to a taxable brokerage account, where NUA treatment applies.
• Everything else, such as mutual funds and cash, goes by direct rollover to an IRA retirement account or another employer sponsored retirement plan.

The lump sum test looks at what leaves the plan within one tax year, and a direct rollover is still a distribution. Pub 575 also treats NUA separately when cash and property are split between a rollover and a distribution. Confirm the details with your plan administrator and a qualified tax professional first, because a mistake can’t be undone.

You can also move only some of the company stock to the brokerage account and roll the rest into the IRA. This lets you choose shares with the lowest cost basis for the NUA strategy.

Withholding on an NUA distribution

The 20% mandatory withholding applies to the taxable part of an eligible rollover distribution paid to you. Pub 575 says it doesn’t apply to NUA you can exclude from income, or to a distribution of only employer securities plus $200 or less in cash. Withholding doesn’t change the NUA tax treatment; it is a prepayment toward your tax.

How an NUA tax strategy works, step by step

Here is how the NUA tax strategy works in practice. Plan it months before the triggering event, because each step depends on the one before.

1. Confirm the triggering event and that your employer retirement plan is one of the qualified plans that can pay employer securities in kind.
2. Ask the plan administrator for the cost basis of the company stock and an estimate of the NUA.
3. Open the receiving accounts: a taxable brokerage account for the shares, and an IRA or a new employer sponsored retirement account that accepts rollovers for everything else.
4. Request one lump sum distribution of the entire balance in one tax year: employer stock in kind to the brokerage account, the rest by direct rollover.
5. Plan to pay taxes on the cost basis when you file, and set aside cash for the tax bill.
6. Decide when to sell. The net unrealized appreciation is long-term capital gains whenever you sell; later growth needs a holding period of more than one year.

Each step has tax rules that can trip you up, so a tax advisor should review the plan before you sign the distribution forms.

An illustrative NUA example

The numbers below are for illustration only, not a forecast.

Say your 401(k) holds 1,000 shares of employer stock with a cost basis of $25,000 and a current market value of $130,000. The NUA is $105,000. You leave the job and take a lump sum distribution in one tax year.

With the NUA strategy: You move the shares to a brokerage account. You pay ordinary income tax on the $25,000 cost basis that year. If you sell immediately, the $105,000 is long-term capital gain, taxed at 0%, 15%, or 20%.

With an IRA rollover: You roll all $130,000 into a traditional IRA. You pay no tax now and get tax deferred growth. Later withdrawals are taxed at ordinary income tax rates.

Later growth: If you hold the shares and sell them six months later for $150,000, the extra $20,000 is short-term gain, taxed at ordinary income rates. Held more than one year, it would be long-term.

Compare the tax hit now with the tax savings later. Here, long-term capital gains rates apply to $105,000 that would otherwise be taxed at ordinary income tax rates from the IRA, a potentially significant tax savings. A higher cost basis shrinks the tax benefit, because more of the value is taxed now as ordinary income.

Is net unrealized appreciation worth it?

It can be, mainly when:

• The company stock has a low cost basis compared with its market value.
• You expect a high ordinary income tax rate on IRA withdrawals.
• You have cash outside the plan to pay taxes on the cost basis.
• You can take a lump sum distribution within one tax year.
• You want long-term capital gains on most of the stock’s value.
• You plan to sell the stock within a few years or want a smaller IRA for future required distributions.

It may not be worth it if you are already in a low tax bracket, if the cost basis is high, if you’d rather keep all retirement assets in a tax deferred account, or if the stock is a small part of your retirement savings. A financial advisor can run both scenarios and show the tax implications of each, including how long-term capital gains and capital gains taxes would affect your plan.

What are the disadvantages of NUA?

An upfront tax bill. You pay ordinary income tax on the cost basis right away, plus a possible 10% additional tax on that taxable part if you’re under 59½ and no exception applies.

Lost tax deferral. In a brokerage account, dividends are taxed each tax year and gains when you sell, while an IRA keeps tax deferral.

Concentration risk. An NUA strategy encourages holding employer stock held in one company. If that stock falls, your retirement income falls with it.

Strict timing. The entire balance must come out in one tax year after a triggering event. Missing that can cost the favorable tax treatment of a lump sum distribution.

Complex tax rules. You’ll track the cost basis, the NUA, and new gains separately. Rules for heirs who inherit NUA shares are different, so ask a tax advisor.

Company stock and other plans

If your company stock came through a profit sharing plan or a stock bonus plan, the same NUA rules apply because those are qualified plans. Check with the plan whether employer stock can be paid in kind; that is a plan rule, not a tax rule. Workers born before January 2, 1936, may be able to use the optional tax methods on Form 4972.

For after-tax contributions rolled into an IRA, track basis on Form 8606. For a broader view of tax planning, see our tax strategy guide.

Choosing between an NUA tax strategy and an IRA rollover

Use an IRA rollover if you want simplicity and full tax deferral. Consider an NUA strategy if you have highly appreciated employer stock and a clear tax plan. Some people use both: the lowest-basis company stock goes to a brokerage account for its favorable tax treatment, and higher-basis shares roll into the IRA with the rest of the employer retirement plan. Compare the tax implications of each option for your income, age, and other retirement plan savings. Our IRA transfer vs rollover guide explains the rollover mechanics.

Federal workers should note that TSP funds don’t hold employer stock; see our TSP to IRA rollover guide. Teachers can see the 403(b) to IRA rollover, and beneficiaries the inherited 401(k) guide. If you’re weighing account types, see traditional IRA vs 401(k).

Talk to a financial advisor before you decide

NUA choices are hard to reverse. A financial advisor and a tax professional can check your cost basis records, project your tax implications, and confirm the plan can split the distribution.

The bottom line

Net unrealized appreciation (NUA) lets you pay ordinary income tax on the cost basis of employer stock now and long-term capital gains rates on the NUA later. It works only with a lump sum distribution after a triggering event, and it trades tax deferral for possible tax savings. Run the numbers, comparing long-term capital gains rates and capital gains taxes with IRA income tax, before you roll company stock or other employer stock from an employer sponsored retirement plan into an IRA retirement account.

Written by Tim Schmidt and reviewed for tax and account accuracy by Sean Webster, CPA. Last reviewed November 10, 2026 (America/New_York). This guide is for general education, not tax, legal, or investment advice, and not a recommendation to roll over, sell, or hold any security. IRAInvesting.com is not a custodian, broker-dealer, plan administrator, tax preparer, or investment adviser. Talk with a licensed tax professional before you act, and confirm current rules on IRS.gov. Investing involves risk, including possible loss of principal.