Question

Which of the following BEST describes the tax treatment of a lump sum distribution made in the form of employer securities?

a. The recipient is taxed on the current market value of the securities at the time of distribution.
b. Employee security distributions are not taxed until sold by the recipient, at which time all proceeds are included as ordinary income.
c. The cost basis of the securities is included as ordinary income at the time of distribution, with any unrealized appreciation exempt from taxation.
d. The cost basis of the securities is included as income upon distribution, with any net unrealized appreciation eligible for capital gains treatment at the time the securities are sold.

Answer 1

A lump sum distribution of employer securities is taxed on the cost basis as ordinary income upon distribution, with any net unrealized appreciation taxed as capital gains upon sale.

Step-by-step explanation:

The tax treatment of a lump sum distribution made in the form of employer securities can be a complex matter. However, the correct option among the provided ones is that the cost basis of the securities is included as ordinary income upon distribution, with any net unrealized appreciation eligible for capital gains treatment at the time the securities are sold.

This means when you receive employer securities as part of a lump sum distribution, you will pay ordinary income tax on the original cost (not the market value) of the stocks at the time they were added to your retirement plan. Any appreciation in the value of the stocks that occurred while the stocks were in the plan will not be taxed until you sell the securities. At that future point, if and when you sell the securities, any profit made in excess of the cost basis (appreciation) will potentially be subject to capital gains tax, which may be at a lower rate than your ordinary income tax rate.