Net unrealized appreciation (NUA)

Net unrealized appreciation (NUA) is the increase in value of your employer's stock while it was held in your 401(k) or other workplace plan, and special rules let that increase be taxed as a long-term capital gain instead of ordinary income.

It applies when you take a lump-sum distribution, meaning your entire balance from the employer's plan within one tax year, usually after a triggering event such as leaving the job or reaching 59½. The company shares move to a regular brokerage account as shares, and the rest of the balance can be rolled into an IRA.

At distribution you pay ordinary income tax only on the plan's cost basis in the shares. The NUA isn't taxed until you sell, and then it is long-term capital gain no matter how soon you sell. Any growth after the distribution follows the normal holding-period rules.

The strategy works best when the cost basis is low compared with the current value. If the shares are rolled into an IRA instead, the NUA treatment is lost and every dollar is eventually taxed as ordinary income.

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