What Is the Net Unrealized Appreciation Rule?

The net unrealized appreciation (NUA) rule is a tax strategy that applies when you take a lump-sum distribution of employer stock from a 401(k) or other qualified retirement plan. Rather than rolling the entire distribution into an IRA — where eventual withdrawals would be taxed as ordinary income — you can elect to take the employer stock in kind and pay ordinary income tax only on the original cost basis of the shares inside the plan. The built-up gain above that basis (the NUA) is then taxed at favorable long-term capital gains rates when you eventually sell the shares, regardless of how long you've held them outside the plan. For example, if your employer stock had a $10,000 cost basis inside the plan but is worth $200,000, you'd owe ordinary income tax only on $10,000 — the $190,000 of NUA is taxed at capital gains rates when you sell. This strategy makes sense only when you have significant built-in appreciation in employer stock and your ordinary income tax rate is substantially higher than your long-term capital gains rate.