Capital Gains Treatment

Definition

Tax treatment that applies to the gain on employer securities purchased in a qualified plan, when the distributed securities are sold .

When the participant takes a distribution, the basis of the employer securities is treated as ordinary income  for the year the distribution occurs. The gain is usually not included in income until the securities are sold, at which time they are taxed at the capital gains rate.

In the case of a distribution other than a lump sum distribution, the amount actually distributed to a participant/beneficiary from a qualified plan does not include any net unrealized appreciation in employer securities attributable to amounts contributed by the employee [Section 402(e)(4)(A) of the Code]

Referring Cite

IRC § 402(e)(4), 402(j); Prop. Treas. Reg. §1.402(a)-1(b)(1); Revenue Ruling 81-122, FORM 4972 Tax on Lump-Sum Distributions , Publication 575

Additional Helpful Information

 

• Amounts rolled over to an IRA are not eligible for the capital gains treatment. Instead, those amount are treated as ordinary income when distributed from the IRA.
• The Taxpayer Relief Act of 1997 Act provided lower capital gains rates for individuals. Generally, the 1997 Act reduced the maximum rate on the adjusted net capital gain of an individual from 28 percent to 20 percent and provided a 10-percent rate for the adjusted net capital gain otherwise taxed at a 15-percent rate. Under the The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98), bill, property held more than one year (rather than more than 18 months) will be eligible for the lower capital gain rates provided by the 1997 Act. The provision applies to amounts properly taken into account on or after January 1, 1998.
• The election for capital gains treatment is made on IRS Form 4972

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