Breaking Down the Tax Treatment of Appreciated Company Stock

Employees pour years into building company stock in their 401(k) with the hopes of having enough gains in their retirement, but as always, tax rates and capital gain rates shatter those hopes. 

Luckily, there is a way to avoid these harsh deductions and save up more money from appreciated company stocks that most people don’t even know about.

This guide highlights the way you can use NUA (net unrealized application) to your advantage and gain a workaround against these taxes.

Key Takeaways

• What Is Net Unrealized Appreciation?
• Why Retirement Planning With Company Stock Matters
• How Does NUA Tax Treatment Work?
• Common Mistakes to Avoid With NUA

What Is Net Unrealized Appreciation?

Net unrealized appreciation (aka NUA) is the growth of employer stock between the original cost basis and current value inside of a qualified retirement plan.

To better illustrate, imagine an employee purchased company stock for $25 per share inside their 401(k). Years later, those shares have grown to be worth $300 each. The net unrealized appreciation is $275 per share — that’s the growth that accrued while it sat inside the retirement account.

Notice how that $275 NUA is taxed differently than the original purchase price (aka cost basis). When done correctly, the NUA gets special tax treatment that can save you tens of thousands at retirement. Leaving that company stock in your 401(k) or rolling it into an IRA without a net unrealized appreciation strategy… You miss out on that tax break and let the IRS take away more than they should!

Why Retirement Planning With Company Stock Is Important

Imagine rolling over your 401(k) into an IRA.

Now, when you retire and take distributions from that IRA, every dollar gets hit with ordinary income tax rates. That includes any company stock you owned inside the retirement account!

Yep. Unless you do some smart tax planning around retirement, all of those years’ worth of stock growth will be taxed way too high.

Ordinary income rates can reach 37% for high-income taxpayers. Meanwhile, long-term capital gains rates top out at just 20%. For most folks, the capital gains tax rate is just 15%.

Now take a look at how much people are actually sitting on. As of June 2025, there was $9.3 trillion sitting in 401(k) plans nationwide. A portion of that sits in company stock and has likely appreciated significantly over the years.

Just think how much you could keep by paying that 15% rate instead of 37%… on hundreds of thousands of dollars worth of stock growth. That’s tens of thousands of dollars that stay in your pocket instead of going to the IRS.

How Does Net Unrealized Appreciation Break Even?

This NUA tax strategy hinges on separating employer stock from the rest of your retirement plan during what’s called a lump-sum distribution. Instead of rolling all your assets into an IRA, you move just the company stock into a taxable brokerage account.

Here’s how the taxes break down once you do this:

1. Cost basis = taxed at ordinary income tax rates in the year of distribution
2. NUA (the stock growth) = taxed at long-term capital gains rates when sold
3. Any gains accrued after distribution = taxed as short-term or long-term capital gains, depending onthe  holding period

That second bullet point right there is the huge tax break. The gains that built up over your entire career will only be taxed at 15-20% instead of ordinary income tax rates.

…and get this. The long-term capital gains rate applies to NUA even if you sell the stock a day after receiving the distribution. It doesn’t matter how quickly you sell those shares. NUA is always taxed at long-term capital gains.

Who Can Qualify For Net Unrealized Appreciation?

Unfortunately, NUA doesn’t apply to everyone. If you don’t follow strict IRS rules, you can easily forfeit this tax break.

Let’s walk through who qualifies before getting into the rules…

In order to take advantage of NUA, you must first experience a “triggering event” as described by the IRS. This includes:

• Separation from service (ex. Leaving the company, retiring)
• Reach age 55
• Becoming disabled
• Death

After this triggering event occurs, you must distribute the entire employer-sponsored plan balance during a single tax year. The company stock portion gets transferred to a brokerage account, while the rest can roll into an IRA.

Keep in mind that the stock must be distributed “in-kind.” What this means is that physical shares are transferred… not sold and then moved as cash. If you sell the shares inside the retirement plan first, you lose access to NUA.

Did You Know?

Unlike regular stocks, the shares of NUA don’t get a step-up in basis upon death, which means that the beneficiary or heir will still owe tax on the appreciation.

When NUA Best Applies

This strategy doesn’t apply to everyone, but it can make all the difference for those who qualify.

Here are scenarios where a NUA tax strategy makes the most sense:

• Stock has a low cost basis compared to its current market value
• You have a high concentration of company stock in your retirement plan
• You are in a lower tax bracket during the year of distribution
• You have a short time horizon until selling the stock

Say you retire mid-year. You’ve already got W-2 income on the books for 2025. If so, it may be worth waiting until the next tax year to pull the money out and drastically lower your taxable income.

Conversely, if you have decades until you plan on touching your investments, sticking with an IRA makes more sense. The tax-deferred growth can outweigh the benefits of paying long-term capital gains.

Check out an example with the help of this illustration to better understand the benefits of NUA:

Common Mistakes To Avoid

Using this strategy comes with heavy risks. If you don’t follow the rules to a tee, you could lose big. Here are the biggest mistakes to avoid when taking NUA:

• Rolling Retirement Funds into an IRA First. Once that company stock touches an IRA, you lose access to the NUA tax break forever. This is by far the most common mistake.
• Partial Distribution. In order to qualify for NUA tax treatment, you must distribute the entire balance of your employer-sponsored plan. Leaving any money behind voids NUA.
• Ignoring The 10% Early Withdrawal Penalty. If you trigger the strategy before age 55 (59½ if you were still working for the company), those distributions may be subject to an additional 10% penalty.
• State Taxes. State tax laws vary, which can impact whether or not this strategy pays off. Make sure to consider them too.

You should always consult a qualified financial advisor or tax professional before making any moves. NUA rules are extremely complex.

Employer stock and its subsequent tax breaks are one of the most overlooked strategies in all of retirement planning. Using NUA correctly could save you thousands in taxes by qualifying your stock gains for long-term capital gains tax rates.

Remember…

• Net unrealized appreciation (NUA) is the growth of your company stock’s value between the original purchase cost and the current value while held inside a retirement plan.
• You pay long-term capital gains taxes on the NUA when you sell the stock (versus ordinary income taxes).
• There are strict IRS rules that must be met in order to qualify for NUA.
• Specific timing and stock cost basis can determine if this tax strategy makes sense for you.
• Mistakes are irreversible, so working with a pro is your best bet.

If you have highly appreciated company stock sitting in your 401(k), evaluating whether a NUA strategy makes sense is one of the most intelligent financial moves you can make before retiring.