Actively managing your tax liability year after year is a major factor in successful investing and should be a key wealth strategy for your entire portfolio of assets. When you receive a stock distribution from your employer, whether in the form of an employee stock purchase plan (ESPP) or non-qualified stock options (NQSOs), it’s important to plan out the tax treatment of net unrealized appreciation (NUA) you will gain in the market.

Maximizing net unrealized appreciation begins with portfolio asset class allocation

Record-keeping and tracking may not be the most exciting aspect of investing, but it’s a foundational element that you need to have in place in order to build a solid investment strategy. If you don’t already have a desktop application or online service to track all your stock, it’s a good time to get one. Come up with a convenient way to review all your equities at once. Some websites offer free ticker tracking in real-time, which is suitable for casual stock research. However, it’s even better to know how your company stock position is performing compared to your other equities and the rest of the market. This becomes especially true if your assets are custodied among several brokerage firms. Having a way to view all of this information at once can give you a crucial overview of your entire portfolio.

Start with each asset class:

  • Cash – money market and cash
  • Fixed Income – credit instruments and treasury holdings
  • Equities – stocks and other equities
  • Commodities and Real Assets – investment property/land, precious metals, equipment, etc.
  • Alternative Assets – hedge funds, derivatives, and private equity

It’s important to remember that how your assets are proportioned within your portfolio can affect tax planning and investment strategy. A qualified financial advisor can help set this up for you and ensure that the proportions of your portfolio allotments make the most sense for reaching your investment goals. 

Once you’ve assured that your assets are allocated smartly, you can focus on other important details. Net unrealized appreciation is the margin between the average price you paid for your company stocks and current market value. If it’s tax filing time, you will be looking at the recorded end-of-year market value. If you hold stocks from multiple employers, it’s important to compare the average cost basis of the stocks you purchased (or were granted) and the numbers of shares you attained. Focus first on the lowest cost shares for NUA planning.

The IRS Guide on NUA considerations

NUA is unique because although your capital gains rate will be lower than your regular earnings income tax, you must immediately pay ordinary income tax on the cost basis of your employee stocks. You can only then rollover the appreciated market value into a 401(k) or IRA to defer capital gains tax. 

Roth vehicles cannot be used for this purpose. However, you may simplify the evaluation of your NUA decisions by rolling your appreciated capital gains into an account separate from your 401(k). Any of your brokerage accounts are already being taxed at either long-term or short-term capital gains rates, so you are not allowed to combine assets from stock grants into these accounts.

The IRS provides instructions on how to transfer or rollover your employer stock benefits to defer capital gains tax: 

  • Defer tax on the taxable part (capital gains) of the distribution by requesting your employer to directly roll over the stock distribution into an IRA.
  • Defer taxes by rolling it into an IRA within 60 days after receipt.
  • Special tax treatment isn’t applicable to all employer bonus compensation.

Review your 1099-R forms. They should detail how much of your investment income is applicable to the capital gains rate. An experienced tax advisor can help you to determine what tactical offsets to make after a year where you have had unexpected losses or extraordinary gains. Remember though, once you leave a company, you must distribute the entirety of the vested balance held in the stock plan, including all remaining assets sponsored by that employer.

Getting the best advice for your individual tax strategy

SD Mayer specializes in helping individuals and families with tax planning around NUA, tax-loss harvesting, and wealth planning. We have experience in portfolio management, strategic asset allocation, and employee stock benefits.

One of the best parts of our job is to help our clients to develop a holistic plan which gives them a sense of empowerment about their future. Our efforts always point to that goal. We are here to learn about you and partner with you on making that next strategic step in your tax and investment strategy. 

If you’re ready to start tracking your assets in the smartest way possible, the advisors at SD Mayer can help. Contact us today for an initial consultation to assess your goals and begin developing a wealth management plan and tax strategy that will set you up for financial success.

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