What is Net Unrealized Appreciation?

Tax time is never a time of the year that people look forward to, especially not if you find yourself owing money each and every year. That being said, it can definitely be more complicated for some people than for others. There’s a huge difference between having a simple form that you fill out with one W-2 and having multiple streams of income along with several 1099s and even taxes on investments. That’s right, the government also taxes any money that you make from investing in stocks. If you have been investing for some time, this certainly won’t come as any surprise to you, as you’ve likely been required to pay taxes on that type of income for years. However, if you’re brand new to the stock market game or you’re just considering investing, this can come as a rather big surprise. For some people, it’s even enough of a surprise to dissuade them from investing in the first place. Fortunately, there’s something that might help you pay fewer taxes on money that you make for stocks. It’s referred to as net unrealized appreciation and under the right circumstances, it can save you a great deal of money.

Net Unrealized Appreciation, Defined

It probably won’t come as any surprise to you that this isn’t exactly the easiest term to define. If for no other reason than the fact that it has to do with doing your taxes, you’ve probably already figured out that it’s going to be something that gives you a migraine when you try to understand it. Fortunately, you’ve come to the right place because here, you can read about what it is and how you would actually utilize it without giving yourself a headache in the process. Put simply, this is the difference in the amount of money that you paid for a particular stock and what it’s actually worth in real time. In other words, let’s say that you purchased several shares of stock for roughly $100 each. Normally, at the end of the year you would have to file taxes on that stock and claim it at that particular price (or higher, depending on its value at the time) when you file your taxes. Even if you haven’t sold those shares yet, you would still have to claim it as an asset. However, in cases where you spent a great deal of money on shares of stock and then something has happened to cause that particular stock to plummet, you can utilize net unrealized appreciation in order to effectively reduce the value of your assets, claim a loss, and avoid paying so much in taxes on the stocks in your portfolio. It’s something that a lot of people don’t do when they file their taxes. In fact, it’s something that some people who are relatively new to investing don’t even realize they can do. Failing to claim any and all net unrealized appreciation can end up costing you a lot of money on your taxes that you don’t need to be spending.

Employees Who Own Stock

Originally, this particular term was put forth for a very specific reason, to help employees who essentially own the company they work for by preventing them from owing tens of thousands of dollars in taxes because of those taxable assets, each and every year. Think about the major corporations that are employee-owned. Individuals who are employees at Walmart typically own stock in the company. There are several grocery store chains which are quite successful that are wholly owned by their employees. If it weren’t for this particular clause, employees could end up owing more money than they could afford to pay on their taxes because of the ability to tax all of these shares. The beauty of the situation is that even those who aren’t employees of a company in which they hold stock can still claim it on their taxes. That wasn’t always the case, hence the reason that some people aren’t particularly aware of their ability to do this. However, it’s important to know that you have a legal right to claim this when you’re doing your taxes and in some cases, it can make a dramatic difference.

Retirement Funds

It’s also worth noting that some people who have stock in a company as part of their 401(k) can also claim this clause on their taxes, effectively eliminating the need to pay taxes on those particular assets unless they have actually been claimed for that particular year in which the taxes are being filed. Again, it’s important to remember that this can potentially make a dramatic difference, especially if you have a rather substantial retirement fund that is in question. There’s no doubt about it, you will have to pay taxes on the majority of those funds during the year that you claim them, but there is no need to be forced to pay taxes on them every year prior to that when you aren’t even able to access them. Using this clause prevents you from having to do exactly that. If you have a good accountant, this is probably something that has already been claimed on your taxes without the need for you to do anything further. However, that may not be the case if you’ve been filing your own taxes and you’ve only recently become aware of this particular clause. That’s one reason that it’s so important to utilize a well-respected accountant that understands all of the assets and income that you have versus your expenditures. Only then can you have any appreciable level of confidence that all of these appropriate types of things are being claimed. If you are the particular type of individual that prefers to do your own tax returns, at least you know about this now. If you didn’t claim it before, you can make an amendment to your current return or at the very least, you know that you can claim it next time.