How to Report NUA on Your Tax Return: 1099-R, Schedule D, and the Deemed Long-Term Rule

The NUA election creates two separate tax reporting events that happen in different years. Most taxpayers — and many tax preparers — confuse the two or miss the "deemed long-term" rule that makes NUA's Schedule D treatment different from any other capital gain. Getting this wrong doesn't change your economic outcome, but it can trigger IRS notices, overstated tax bills, and missed long-term capital gains treatment on stock you could have sold the day after distribution.

Two tax events, two different years

The NUA election creates a clean split in your tax reporting:

The Box 6 NUA amount — which represents the appreciation that built up inside the plan — is deliberately excluded from your income in the distribution year. It was never inside an IRA, so the tax-deferral clock that normally runs inside a retirement account is replaced by a different mechanism: when you sell, the NUA converts directly into long-term capital gain, as if you had owned the stock for more than a year regardless of how long you actually held it after distribution.¹

How to read your 1099-R after an NUA distribution

Your plan administrator issues a 1099-R for the year of distribution. Here's what each relevant box means in an NUA context:

Box 2a will likely be significantly smaller than Box 1. For a high-appreciation position (say, a 10:1 ratio), Box 2a might be $100,000 while Box 1 is $1,000,000 — and Box 6 is $900,000. That $900,000 in Box 6 is simply absent from your current-year income. It waits.

Distribution year: what goes on your 1040

In the year of distribution:

1. Box 2a → Form 1040 Line 5b (taxable pension/annuity income). This is ordinary income — taxed at your marginal rate, not the preferential capital gains rate. For a retiree in the 22% bracket, this means you pay 22% on the cost basis and nothing else that year.
2. Box 4 withholding → Form 1040 Line 25b (federal income tax withheld from pensions). The 20% mandatory withholding is a credit. If your actual tax liability on Box 2a is less than 20%, you get the excess back as a refund.
3. Box 6 → nothing. You do not report Box 6 anywhere on your 1040 in the distribution year. There's no schedule, no attachment, no entry. The NUA amount is invisible to your current-year return. If your tax software asks you to confirm the Box 6 amount, it is capturing it for future reference — not adding it to your income.

The only exception: if you choose to voluntarily include the NUA in your current-year income (an election available under IRC § 402(e)(4)(B)), you would report Box 6 as ordinary income. Almost no one does this — it converts what would be future LTCG income into current ordinary income, which is nearly always worse. There's no mechanism on the 1040 that forces you to make this election; you'd need to affirmatively include it.

Your cost basis in the taxable brokerage account

When the employer stock arrives in your taxable brokerage account, the receiving broker needs a cost basis on record. This is a frequent point of confusion — and a common source of tax reporting errors years later when you sell.

Your cost basis per share = plan cost basis ÷ total shares received.

This is the same per-share amount that underlies Box 2a on your 1099-R. It is not the market value of the stock on the date of distribution. If you received 10,000 shares with a FMV of $100/share but a plan cost basis of $10/share, your cost basis in the taxable account is $10/share — even though the brokerage receives stock worth $100/share.

When you sell: Schedule D mechanics and the deemed long-term rule

When you sell the employer stock — whether one day or five years after the distribution — you report the sale on Schedule D (Capital Gains and Losses). The key rules:

Rule 1: The NUA amount is always long-term capital gain

Under IRC § 402(e)(4)(A), the NUA in employer securities is explicitly treated as long-term capital gain in the year of sale, regardless of how long you held the stock after distribution.¹ You could receive the stock on January 1 and sell it on January 2 — the NUA amount (from your 1099-R Box 6) is still long-term capital gain. This is the "deemed holding period" that makes NUA uniquely powerful compared to concentrated stock acquired in the open market.

What this means practically: the NUA portion goes on Schedule D Part II (long-term), not Part I (short-term), even if you sell within days of distribution.

Rule 2: Your cost basis on Schedule D is the plan cost basis

Your Schedule D entry uses the per-share plan cost basis — the same figure that drove Box 2a on your 1099-R. The difference between your sale proceeds and this cost basis is your total gain. Of that total gain:

• The NUA amount (Box 6 from your 1099-R) is long-term capital gain
• Any additional gain above the NUA amount (if the stock appreciated further after you received it) depends on how long you held the stock from the distribution date

Rule 3: Your holding period for post-distribution appreciation starts at distribution

For gain beyond the NUA amount — appreciation that occurred after the stock arrived in your taxable account — the standard holding period rules apply. The clock starts on the distribution date, not the original purchase date or your hire date. If you sell within one year of receiving the stock and the price has risen above the distribution date value, the incremental gain above the NUA amount is short-term capital gain.

Post-distribution appreciation: the short-term vs long-term split

If you sell after the stock has appreciated above its value on the distribution date, you need to allocate your gain between the NUA portion (always long-term) and the post-distribution portion (short or long-term based on holding period).

The allocation uses the fair market value of the stock on the distribution date as the dividing line:

• Gain up to distribution date FMV (minus cost basis) = NUA amount = long-term CG
• Gain above distribution date FMV = post-distribution appreciation = short or long-term based on holding period

In practice, this means you may need to report one block of shares as two Schedule D entries:

1. A long-term entry with proceeds set to the distribution date FMV and cost basis set to the plan cost basis — reporting the NUA amount as long-term CG
2. A second entry (short or long-term) with proceeds set to the actual sale price and "cost basis" set to the distribution date FMV — reporting the post-distribution appreciation

If you sell more than one year after the distribution date, all gain — both NUA and post-distribution appreciation — is long-term, and you can consolidate into a single Part II entry.

Worked example: full distribution and two sale scenarios

Setup: Diane, age 64, retires and elects NUA on her employer stock. She distributes 10,000 shares in October 2025.

• Distribution date FMV: $100/share ($1,000,000 total)
• Plan cost basis: $8/share ($80,000 total)
• 1099-R Box 1: $1,000,000
• 1099-R Box 2a: $80,000 (taxable as ordinary income in 2025)
• 1099-R Box 6: $920,000 (NUA — not taxed until sale)

Distribution year (2025) reporting:

• Form 1040 Line 5b: $80,000 (ordinary income)
• Tax on $80,000 at 22%: ~$17,600
• Box 6 ($920,000): reported nowhere. Invisible to 2025 return.

Scenario A — Diane sells in March 2026 (5 months after distribution) at $100/share (no change in price):

• Proceeds: $1,000,000
• Cost basis: $80,000
• Total gain: $920,000
• NUA amount: $920,000 → long-term CG (Part II, Schedule D)
• Post-distribution appreciation: $0 (price unchanged)
• Federal LTCG tax at 15%: $138,000 (assuming Diane's income puts her in the 15% bracket)
• Total two-phase federal tax: $17,600 + $138,000 = $155,600 on a $1M position

Scenario B — Diane sells in March 2026 (5 months after distribution) at $115/share (stock rose 15%):

• Proceeds: $1,150,000
• Cost basis: $80,000
• Total gain: $1,070,000
• NUA amount: $920,000 → long-term CG (Part II, Schedule D)
• Post-distribution gain: $150,000 ($1,150,000 proceeds − $1,000,000 distribution FMV) → short-term CG (Part I, held only 5 months)
• Schedule D: two entries — $920,000 long-term (15% rate), $150,000 short-term (37% rate if high earner)
• Takeaway: holding the stock until the 1-year mark from distribution would convert that $150,000 from 37% short-term to 15-20% long-term — saving up to $25,500 on the incremental gain.

Scenario C — Diane sells in December 2026 (14 months after distribution) at $115/share:

• Same proceeds, same cost basis, same total gain as Scenario B
• But now: held >12 months from distribution date → all gain is long-term
• Both the $920,000 NUA and the $150,000 post-distribution gain go on Schedule D Part II
• Tax at 15% LTCG rate: ($1,070,000 × 15%) = $160,500 federal
• Compare to Scenario B: $138,000 + $55,500 (37% on $150K) = $193,500 — Diane saves $33,000 by waiting 9 more months

State tax reporting differences

Federal treatment is favorable. State treatment varies widely and for high-tax states, the state-level reporting is nearly as important as the federal.

For California residents, the NUA appreciation on your Schedule D will be taxed at ordinary income rates for state purposes — up to 13.3% on top of the federal LTCG rate. This does not eliminate the NUA advantage (federal rates differ enough that NUA often still wins), but it substantially narrows the gap compared to zero-income-tax states. See the full analysis in the NUA state taxes guide.

For state returns, you will typically need to adjust the gain amounts reported — your state Schedule D (or equivalent) may treat the same transaction as all ordinary income rather than applying preferential LTCG rates to the NUA portion. Tax software handles this automatically for most states, but verify if you're preparing the return manually.

Form 4972: when it applies (and usually doesn't)

Form 4972 (Tax on Lump-Sum Distributions) is used for an alternative tax treatment available to plan participants born before January 1, 1936 — specifically, the 10-year forward income averaging option and the capital gains treatment for pre-1974 plan participation.

Most people who execute NUA distributions today were not born before 1936 and cannot use Form 4972. Even for those who can, the 10-year averaging calculation is a separate election from NUA, not a complement to it — you cannot elect both NUA treatment and 10-year averaging on the same lump-sum distribution in most cases. The NUA route (capital gains treatment on appreciation, ordinary income on cost basis, deferred until sale) is almost always superior for participants who have significant low-basis employer stock.

If you were born before 1936 or have pre-1974 plan participation, discuss Form 4972 with a CPA before filing to determine whether any combination of elections applies to your situation. For the vast majority of NUA participants, Form 4972 is not relevant.

3 common reporting mistakes

1. Including Box 6 as income in the distribution year

Some tax preparers, unfamiliar with NUA, enter all of Box 1 as taxable income on the grounds that "it's the gross distribution." This overstates your income by the full NUA amount — potentially hundreds of thousands of dollars — and results in a massive tax overpayment. Box 2a is the taxable amount; Box 6 is not. If you notice this on a prepared return before filing, correct it. If you've already filed with Box 6 included, you can file an amended return (Form 1040-X) within the applicable statute of limitations.

2. Using distribution date FMV as cost basis on Schedule D

When stock arrives in a taxable brokerage account, brokerages sometimes record the cost basis as the current market value (what the stock is worth on the transfer date). For most transferred assets, that's correct. For NUA stock, it is wrong. The cost basis must be the plan cost basis — the amount that was taxed as ordinary income at distribution. Using FMV as cost basis understates your gain and creates a mismatch that the IRS will eventually identify when it compares your 1099-B (from the brokerage) to your Schedule D. Correct the cost basis with your brokerage as soon as the stock arrives.

3. Reporting all NUA gain as short-term because of a short holding period

If you sell NUA stock within 12 months of distribution, some software or preparers may classify the entire gain as short-term based on the holding period. The NUA amount from Box 6 is always long-term, regardless of how long you held the stock after distribution. Only additional appreciation above the distribution date FMV is subject to the holding period test. The deemed long-term treatment for the Box 6 amount must be manually applied — it will not flow automatically from a brokerage 1099-B, which tracks holding period from transfer date only.

Sources

1. IRC § 402(e)(4)(A) — Net Unrealized Appreciation: employer securities distributed as part of lump-sum distribution; NUA treated as long-term capital gain in the year of sale regardless of holding period; cost basis in plan is ordinary income at distribution.
2. IRS Rev. Proc. 2025-32 — 2026 tax inflation adjustments. Long-term capital gains tax rate thresholds for 2026: 0% ≤ $49,450 single / $98,900 MFJ; 20% ≥ $545,501 single / $613,701 MFJ; 15% between. Includes OBBBA amendments.
3. IRS Publication 575 — Pension and Annuity Income. NUA tax treatment: Box 6 reporting, deemed long-term capital gain treatment, Schedule D mechanics, and the optional election to include NUA in current-year income (IRC § 402(e)(4)(B)).
4. IRS Instructions for Forms 1099-R and 5498 — Box 6 (Net Unrealized Appreciation): reporting requirements for plan administrators issuing 1099-R after a lump-sum distribution including employer securities; relationship between Box 1, Box 2a, and Box 6.
5. IRS Form 4972 — Tax on Lump-Sum Distributions. 10-year averaging and capital gains treatment for pre-1936 birth year and pre-1974 plan participation. Separate election from NUA treatment; generally not applicable to most current NUA distribution participants.

NUA is an irreversible one-shot election under IRC § 402(e)(4). Tax reporting rules verified against IRS Publication 575 and IRC as of 2026. 2026 LTCG rate thresholds from IRS Rev. Proc. 2025-32. NIIT: IRC § 1411, 3.8% on net investment income above $200,000 single / $250,000 MFJ MAGI. State tax treatment varies — consult a qualified tax professional familiar with NUA before filing. This page does not constitute tax or legal advice.