NUA Stock Sale Basis

Submitted by Gene Turley on Wed, 2023-12-27 19:01

I have never had to address an NUA before. Unfortunately, Pershing LLC did not report any basis on the stock when reporting to the IRS with their 2019 and 2020 1099-B and did not send one to the taxpayer. Looking for the basis if any on 1099s.

I do have the 2019 1099-R when the NUA treatment took place, and the brokerage statements that shows the transfer in and the two sales of the stock the bring the number of company shares held to zero.

2019 1099-B (NUA Event 10/10/2019)
Box 1 162,389.64
Box 2 64,960.98
Box 6 97,428.66
Shares 977
NUA/Share $99.72 (97,428.66/977)

Sale 1 11/22/2019 (this transaction was also reported on a 1099-B by Pershing to the IRS without a cost basis, but the taxpayer did not receive or report the income and the IRS did not send discrepancy notice)
488 Shares sold at 179.17/Share is $87,434.96

Sale 2 1/29/2020
489 Shares sold at $174.93 (This calculates to $85,540.77 though Pershing reported proceeds of $85,082)

What should have been reported on the 1099-B’s for Proceeds and Cost Basis?

Thank You.



Submitted by David Mertz on Wed, 2023-12-27 19:42

  • The NUA event was reported on a Form 1099-R, not a Form 1099-B.  If the distribution reported on this Form 1099-R consisted of nothing but the NUA shares, the cost basis of the NUA shares is $66.49 per share ($64,960.98/977).
  • Sale 1 appears to be a taxable gain of $54,987.84.  It’s likely that this would be a substantial underreporting of income that would extend the statute of limitations to 6 years instead of 3 years for the IRS to assess tax and penalty.
  • Sale 2 appears to be a taxable gain of $52,568.39, reportable on the 2020 tax return.  The regular 3-year statute of limitations for the IRS to assess tax and penalty has not yet expired, but again this might be considered to be a substantial underreporting of income that would extend the statute of limitations to 6 years.

Submitted by Gene Turley on Tue, 2024-01-09 20:40

DMx, Yes a 1099-R. You calculated the basis for the shares sold in sale 1 and sale 2 as $66.49 (1099-R box 2 of $64,960.98 / 977 shares) in your reply.  It is like the NUA created a step-up in basis in those shares. Can I think of it that way?Just thinking, since these shares were sold just 4 months after the NUA event, would they be taxed as short-term gain – ordinary income? 

Submitted by Alan - IRA critic on Wed, 2023-12-27 20:42

  • This situation indicates how badly the IRS lost control during Covid, since failure to report a 1099R or a stock sale on 1099 B is a basic matching process. 
  • While the NUA per share is taxable at the LTCG rates, the additional gains following the date of distribution are taxable at the short term rate, since shares were not held for more than one year from the distribution date prior to sale. This will require an explanatory statement regarding Form 8949 since the same shares being sold are subject to both LT and ST cap gain rates. 

Submitted by David Mertz on Tue, 2024-01-09 21:17

I don’t know what you are seeing as a step-up in basis.  The basis of the NUA shares upon distribution is the price at which the shares were purchased or added within the retirement account, which is the same as the taxable amount of the distribution.  Without NUA treatment the cost basis of the shares outside the retirement account would become the entire gross amount of the distribution, but the entire gross amount of the distribution also would be taxable as ordinary income.

Submitted by Gene Turley on Wed, 2024-01-10 21:13

Thank you for your patience and answering. So what the NUA does is that it treats stock put into the retirement as ordinary income with the taxable amount being the share price at the time of the shares going into the 401K account (I guess it is the average price of the shares, in my scenario $66).  Then any gain beyond that price is treated as capital gains possibly taxed at 15%.  Since these shares were sold within 4 months of the NUA event aren’t the gains treated as ordinary income as well, making the NUA strategy ineffective?

Submitted by David Mertz on Wed, 2024-01-10 21:20

The NUA distributed from the 401(k) is taxable as long-term capital gains regardless of how long the shares are held outside the 401(k).  The only part that is taxable at short-term capital gains rates (ordinary income rates) is the gains outside the 401(k), and only because the shares were not held outside the 401(k) for at least a year.

Submitted by Alan - IRA critic on Wed, 2024-01-10 21:23

  • No. The amount of NUA per share will always be taxed at the lower LTCG rates. However, if those shares generate further gains after the LSD, those further gains will be taxed at ST rates if the shares are sold in the first year after the LSD. After the first year passes, all gains get the LT rate. 
  • Notably, if the participant passes still holding the NUA shares, the cost basis per share and additional gains per share after the LSD get the basis adjustment. The amount of NUA per share does not. Therefore, the beneficiary of the participant when inheriting the shares, will owe LTCG tax on the NUA per share when sold.

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