In some cases, stock in an employer has been acquired as a result of a distribution from a 401k Plan that is a Net Unrealized Appreciation (NUA) distribution. In this
situation, you pay ordinary income tax at the time of the distribution only on the original
cost of the company stock inside the 401k plan. You then pay capital gains tax on the appreciation only when you sell the shares.
Taking advantage of this option at the time of distribution of employer stock from a 401k plan is highly advantageous because it both: (1) postpones taxation on the unrealized appreciation; and (2) allows for payment of tax at the more favorable capital gains rate when you do decide to sell.
This option is only available when the employer stock is distributed from the company's 401k plan to your own name. You can take a 401k distribution of just the company stock to capture the NUA tax benefit and then rollover the remainder of your 401k plan to an IRA.
Your cost basis in the "NUA" shares is then the actual amount that you paid for the stock while it was held by the 401k plan. Since this was often accomplished through payroll deductions, you will most likely have many tax lots of fractional shares at different times and prices. You will need to obtain a cost basis report from your 401k plan administrator or go back to capture the data from all of your 401k statements since inception. The total cost basis of the employer shares will also be the amount that appears on your Form 1099-R at year-end reporting taxable income to you from a 401k plan distribution. You still need to have the individual tax lot information in case you want to use the specific identification method to minimize taxes when you sell the shares.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.