How to Report Net Unrealized Appreciation on a Tax Return

To report Net Unrealized Appreciation on a tax return, you use two forms in two different years: in the year of the lump-sum distribution, you report the cost basis of the employer stock as ordinary income on Form 1040 using the figures from Form 1099-R; in the year you sell the shares, you report the sale on Form 8949 and Schedule D, using that same cost basis to calculate the capital gain. The NUA itself, shown in Box 6 of the 1099-R, is excluded from income at distribution and taxed only when the stock is sold.¹

Start With Form 1099-R

The plan administrator issues Form 1099-R for the year of the distribution, and the numbers you need for the return sit in four boxes.

Box 1, Gross Distribution — the total fair market value of the stock plus any cash you received.
Box 2a, Taxable Amount — the portion included in income this year. For an NUA distribution, this is generally the original cost of the securities.
Box 6, Net Unrealized Appreciation — the growth in the shares while they were held in the plan. This amount is excluded from gross income in the year of distribution and deferred until sale.¹
Box 7, Distribution Code — identifies the reason for the distribution and signals to the IRS whether the distribution qualifies and whether an early-distribution penalty is in play.

Also check Box 4 for any federal income tax withheld. You will need that figure on the 1040.

Reporting the Distribution on Form 1040

Enter the gross distribution from Box 1 of the 1099-R on Line 5a of Form 1040 (Pensions and Annuities). Enter the taxable amount from Box 2a on Line 5b. The Box 6 NUA does not appear as income on the return in this year; it stays deferred until sale.²

Any federal income tax withheld (Box 4 of the 1099-R) is reported on Line 25b of Form 1040, which is the line for federal income tax withheld from 1099 forms. That amount credits against your total tax for the year.²

If the 10% Early Distribution Tax Applies

A 10% additional tax may apply if the participant was under age 59 1/2 at the time of the distribution. Exceptions include distributions made because of death or disability, and distributions to an employee who separated from service during or after the year they reached age 55.³

When the penalty applies, it is calculated on the portion of the distribution includible in gross income (the Box 2a amount, not Box 6). Report it on Form 5329. If the 10% tax is the only additional tax you owe, you may be able to report it directly on the return without filing the full Form 5329.⁴

Reporting the Sale of the Stock

The second half of the reporting happens whenever you actually sell the employer shares, which may be years later. Report each sale on Form 8949, listing the acquisition date, the sale date, the sale proceeds, and the cost basis.⁵

The cost basis you use is the amount that was already included in your income at the initial distribution — the Box 2a figure from the 1099-R. The gain above that basis is what gets taxed at sale. Any gain up to the amount of NUA computed at distribution is treated as long-term capital gain regardless of how long you personally held the shares after the distribution.¹

Totals from Form 8949 carry to Schedule D, which summarizes the year’s capital gains and losses.⁵

One Boundary to Keep in Mind

NUA treatment only applies when the distribution is a qualifying lump-sum distribution: the entire balance of the employer’s qualified plans of the same type must be distributed within a single tax year, and the distribution must be triggered by death, reaching age 59 1/2, separation from service, or disability. A partial withdrawal or an ongoing series of payments does not qualify, and the Box 6 figure on a 1099-R only carries the NUA benefit if the underlying distribution meets these rules.¹

1
Office of the Law Revision Counsel. 26 U.S.C. § 402
2
IRS. Form 1040 (2025)
3
Office of the Law Revision Counsel. 26 U.S.C. § 72
4
IRS. Form 5329 (2025)
5
IRS. Form 8949 (2025)