NUA Tax Reporting After First Year
I am using the NUA option on company stock, and paid the ordinary tax rate on the complete cost basis of all company stock in the year taken. Say basis was $100,000, and Total value of stock $500,000 on date of transfer in-kind from my 401K to taxable account. Leaving NUA balance of $400,000 (which will be taxed at long term capital gains rates when shares are sold).
Let’s say the number of shares was 5000 shares when moved into the taxable account. On taxes how do I show deduction of the number of shares that are the cost basis (which I already paid full ordinary tax on in year moved)?
I need help understanding as I sell the shares that I am pay long term capital gains on the 5000 shares less the cost basis shares?
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-01 16:56
First, I would see if your broker will track the cost basis per share for you as that will result in the 1099B issued when you sell showing your cost basis and LT gain. Then simply report on Form 8949 in the LT section if you are required to use Form 8949. This is the most simple scenario, since it does not involve any ST gain if you sell any shares in the first year. It will also be very helpful if you do NOT reinvest any dividends in the same shares because then you will have non NUA shares as well and be even less diversified. If your shares lose value when you sell, your NUA per share is just reduced from the amount at distribution. If the shares then gain the lost NUA back, your NUA is restored to the original value per share. Again, the actual tax reporting you do will be easier if your broker records the cost basis on the 1099 B. Are you selling any shares held less than a year after the distribution date?
Permalink Submitted by Laura Cox on Wed, 2022-03-02 01:31
Thank You for your reply. I would sell some shares before the one year anniversary of moving shares from my 401k, and my understanding is that if the shares sell for more than the share value at time of 401k move, the gains would be taxed at ST gain rates, correct?Given the value of the 5000 shares at time at 401k move to taxable account is $500,000 ($100/share), Basis is $100,000 ($20/share), NUA $400,000 ($80/share). If I sell 1000 shares for $100/share is the LT gain tax on (1) $100,000, (2) $20,000 ($20/share basis), or (3) $80,000 ($80/share nua)?
Permalink Submitted by Alan - IRA critic on Wed, 2022-03-02 02:25
Additional gains after distribution when shares are sold in the first year are taxed at the ST rate. But the original NUA is still taxed at the LT rate. Your example assumes the sale price is identical to the price at distribution (100/share) and therefore the gain is 80/share and the LT rate applies. Had the shares sold for 110/share you would have to report a LT gain of 80/share and a ST gain of 10/share. The IRS has not stated how to report this result given a 1099B with a cost basis of 20 and a sale price of 110. One way to show this is to break up the sale showing 20 cost 100 proceeds in the LT section of Form 8949, and a cost basis of 110 and proceeds of 110 in the ST section, including an explanatory statement.
Permalink Submitted by Laura Cox on Wed, 2022-03-02 15:03
Thank you! Thank you! I’m all clear now, after pondering on this way too long.