Getting long-term capital gain rather than ordinary income

Distributions from ESOPs to plan participants can be made eligible for LTCG, rather than ordinary income (OI), tax on net unrealized appreciation (NUA). This means that, to the extent that the value of company stock in a participant’s ESOP account exceeds its tax basis to the ESOP, LTCG rather than OI, tax will apply when the stock is distributed and then sold back either to the company or its ESOP. Considering the fact that the company got a tax deduction for placing that stock in its ESOP with no current offsetting income tax payable at that time by the ESOP’s participants (frequently including the seller, family and 25 percent stockholders), for them to get LTCG, rather than OI, tax on the gain they ultimately realize produces a particularly advantageous end result.

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