NUA
Situation: I have a 401(k) plan and take the employer stock out in kind paying income tax on the cost basis only. When the shares are sold, the difference between the cost basis and the market value at the time of distribution, the net unrealized appreciation (NUA), is taxed at long-term capital gains rates. The cost basis of the employer stock is $25 and the market value at time of distribution is $100. I know that I have the following tax implications under these scenarios:
• If I sell the stock at the time of distribution, I have a long term cap gain of $75.
• If I sell the stock within one year and the market value at the time of sale is $125, then I have a $75 long term gain and a $25 short term gain.
• If I sell the stock after one year and the market value at the time of sale is $125, then I have a $100 long term gain.
But what if the market value drops to $75 and is sold either within 1 year or after 1 year, do you ignore this and still pay a capital gain on the difference between the cost of $25 and the market at distribution of $100? Or, do you only show a gain of $50 ($75 sale price less $25 cost)? Or is there a loss?
Permalink Submitted by Alan Spross on Wed, 2010-01-27 02:45
Your bullet points are all correct.
For your question, the reduction in FMV results in a reduction of the NUA per share from $75 to $50. There is no capital loss until the FMV drops below $25 at the time of sale. Obviously, the FMV will fluctuate constantly and if the value drops but is then recouped, the original NUA is restored back up to the max of $75 per share.
Permalink Submitted by mk foss on Wed, 2010-01-27 21:12
This discussion I presume assumes that the stocks is distributed as part of a lump sum distribtuion in order to qualify as NUA. If shares are received in a distribution that does not qualify as a lump sum distribution, only the NUA attributable to the employee’s after-tax contributions is excludable.
Permalink Submitted by Shelly Rostosky on Thu, 2010-01-28 00:03
Thank you for your responses. Yes, the shares were part of a lump sum distribution.