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Updated July 28, 2026. Quick answer: Under IRC §402(e)(4)(B) a qualifying lump-sum distribution of employer securities taxes only the plan’s cost basis as ordinary income now; the appreciation becomes long-term capital gain when sold. It favours a low basis relative to value.
If your 401(k) holds appreciated employer stock, you have a one-time election most people never hear about. Taking the shares in kind under the NUA rules taxes only the plan’s cost basis as ordinary income now, and the appreciation as long-term capital gain when you sell.
What NUA actually does
Normally every dollar leaving a 401(k) is ordinary income. Under IRC §402(e)(4)(B), if you take employer securities as part of a qualifying lump-sum distribution, only the plan’s cost basis is ordinary income at distribution. The net unrealised appreciation — the rest — is taxed as long-term capital gain when you sell, and it gets that treatment regardless of how long you actually held.
NUA is a one-shot election on employer stock, and rolling it over ends the option.
The comparison above turns on your cost basis and your bracket, and it cannot be undone once the shares move. The advisers below pay for the introduction — make them defend a recommendation against these numbers. It is free to you, and it is not the only way to find an adviser.
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Why basis ratio decides it
The cost of the election is ordinary tax on the basis, paid now. The benefit is rate arbitrage on the appreciation. So NUA favours a low basis relative to value — long-tenured employees who accumulated stock cheaply. A high basis ratio means paying a lot of ordinary tax immediately to convert very little.
The election is irreversible and depends on executing a qualifying lump-sum distribution correctly (IRC §402(e)(4)(D)) — the entire balance across all like plans, in one tax year, after a triggering event. A partial rollover beforehand can disqualify the whole thing. This is not a do-it-yourself transaction.
What the arithmetic leaves out
Paying tax now versus deferring it in an IRA has real value that this comparison ignores, and it cuts toward the rollover. Against that, the shares come out of the plan and can be diversified immediately — whereas leaving employer stock inside a 401(k) is the most concentrated position most people ever hold without noticing.
Sources
IRC §402(e)(4)(B) (net unrealised appreciation); IRC §402(e)(4)(D) (lump-sum distribution); IRC §1222(3).
This states what the cited authority says. It is not tax advice.