Net Unrealized Appreciation (NUA)
What is Net Unrealized Appreciation (NUA)?
How Does Net Unrealized Appreciation (NUA) Work?
Let's assume Jane purchased 100 shares of Company XYZ for $3 per share 20 years ago. The shares are trading at $100 per share today. Jane's NUA is $100 - $3 = $97 per share, or $9,700.
note that Jane does not "realize" the value of her investment until she sells the shares.
Why Does Net Unrealized Appreciation (NUA) Matter?
Notably, a good or service is only worth what someone is willing to pay for it. As such, unrealized gains and losses are little more than numbers on paper -- you can't pay the bills with NUA. After all, the essence of NUA is that the gain is unrealized. That is, the security has not been sold.
NUAs, however, can trigger tax liabilities. For example, when employers give stock to employees, the portion of the value of that stock that is attributable to an NUA is sometimes subject to ordinary income tax or capital gains tax even if the recipient has not actually sold the stock.
NUA is the reason the term "paper millionaire" is significant -- owning 40% of a tech company that is "worth" billions has little impact on the owner's checking account until he or she sells the shares.