justifying LTC Capital Gains on NUA case
I have a client that has rolled their highly appreciated stock from his 401k to a brokerage account in Feb 28 2018. The tax return was prepared. Everything was good.
The client wanted to let the stock sit in the account for a period of time for a future use.
Then the client sold the stock in Feb 15 2019.
The brokerage firm 1099 shows that the gain was short term Capital Gains.
It is my understanding that the gain can still be reported as a Long term Cap Gain.
How do we show on the tax return that the gain is to be reported as Long Term Capital gain?
Permalink Submitted by Alan - IRA critic on Fri, 2020-06-05 16:34
The brokerage probably did not know the shares were NUA shares, or their cost basis for NUA purposes. Note that because the client sold less than a year after distribution, if the shares increased in value after distribution, the additional gain after distribution will be taxed at ST rates. The amount of NUA per share will be LT gain. In this situation, the client will have to report the ST gain in Part I of Form 8949, and the LT gain in Part II. Regardless of who is preparing the return, they might not understand this or they might understand it but still not know how to report it because the IRS has not published detailed guidance. Before going any further, was the share price higher when sold than it was when distributed resulting in a split of the gain?
Permalink Submitted by Patrick Paxton on Fri, 2020-06-05 17:10
When the stock was sold in Feb 2019- the price was approx $97.00 share.When the stock was distributed in Feb 2018 – the price was approx $91.00 shareThank You for any assistance possible!!
Permalink Submitted by Alan - IRA critic on Fri, 2020-06-05 17:56
Because the sold shares were not held over 1 year after distribution, $6 per share is ST gain. One way to report this is to show $6 per share proceeds in Part I of Form 8949 and a cost basis of 0 per share leaving the balance as ST Gain. The Part II entry would show the proceeds based on $91 per share and the cost basis the same as what the NUA cost basis was upon distribution. Between the 2 entries, the proceeds total would match the 1099 B. The adjustments columns would have to be completed, and perhaps an explanatory statement why the 1099 B was broken down into two entries. Of course, if the return is being prepared professionally, the preparer may have their own way to showing the correct end result. Obviously, would have been simpler if the shares were sold 2 weeks later, then all the gain would be LT and only one entry on the 8949.