How is employer stock in a pension taxed?

What NUA is

Publication 575 defines net unrealized appreciation as the net increase in the securities’ value while they were in the trust. As an illustration, suppose a plan bought your employer’s stock for $20,000 and it is worth $80,000 when distributed. The $60,000 increase is NUA. Normally a distribution from a qualified plan is ordinary income, but for employer securities the publication allows the NUA to be left out of income at distribution, deferring it until you sell. The tax deferral applies to the employer corporation’s stocks, bonds, registered debentures and debentures with interest coupons attached.

When all the NUA is deferred

If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in income for the year of distribution. The publication defines a lump-sum distribution for this purpose as payment of the participant’s entire balance, within a single tax year, from all of the employer’s qualified plans of one kind, paid because of the participant’s death, after age 59½, because the participant separates from service, or, for a self-employed person, after total and permanent disability.

If the distribution is not a lump sum, deferral applies only to NUA from employee contributions other than deductible voluntary employee contributions.

What gets taxed, and when

Whatever part of the distribution is taxable, other than the deferred NUA, is handled under the usual distribution rules and reported by the plan. The publication lists your basis in the securities as the total of your contributions to the plan attributable to the securities, your employer’s contributions that were taxed as ordinary income in the year of distribution, and NUA attributable to employer contributions that was taxed as ordinary income that year. The deferred NUA is not in your basis and appears in box 6 of the Form 1099-R.

When you sell or exchange the securities, any gain is long-term capital gain up to the amount of the NUA that is not part of your basis. Gain above that is long-term or short-term depending on how long you held the securities after the distribution. The calculator splits the gain on a sale that way. Any loss is not addressed by the NUA rules in this publication.

Electing to include the NUA

You may instead choose to include the NUA in income in the year of the distribution. The publication says you may do this only if you elect not to use NUA treatment. The full value of the securities is then taxed as ordinary income in the year of distribution and no portion qualifies for capital gain treatment under the NUA rules. See the Instructions for Form 4972 for the election. If you choose to include NUA and the participant was born before January 2, 1936, optional methods for figuring the tax on the NUA may exist.

Worked example

An employee receives employer stock in a lump sum. Her basis in the shares is $20,000 and the NUA is $60,000, so the stock was worth $80,000 at distribution. The plan reports the taxable part of the distribution, and the $60,000 NUA is deferred. Two years later she sells for $100,000. Her gain is $80,000: $60,000 is long-term capital gain because it is NUA, and the extra $20,000 is long-term too because she held the shares more than a year after distribution. If she sold six months after distribution at the same price, the $60,000 would remain long-term, but the extra $20,000 would be short-term. The 10% additional tax on early distributions is a separate question that depends on her age and exceptions.

Related cautions

The publication says that amounts rolled over to a traditional IRA are taxed as ordinary income when you later withdraw them, so a rollover and NUA deferral are not the same path. Whether you qualify as a lump-sum distribution depends on the full set of the employer’s plans of that kind. Also compare the tax with the plan’s other distribution options before you decide. A tax professional can model your actual numbers.

Sources

• IRS Publication 575, Pension and Annuity Income (2025): Distributions of employer securities (Figuring the Taxable Amount); Lump-Sum Distributions: Net unrealized appreciation (NUA). Read November 2, 2026.

Edition read: Publication 575 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.