Is my 401(k) withdrawal taxed as capital gains?

No — pre-tax 401(k) distributions are ordinary income, always. The lone capital-gain treatment inside a plan is net unrealized appreciation on employer stock distributed in kind.

What is net unrealized appreciation (NUA)?

Employer stock held in the plan and distributed in kind: you pay ordinary rates only on the plan’s cost basis, and capital-gain rates on all growth when you later sell. It can beat a rollover by five figures.

Do I owe tax on a rollover?

Not on a proper one: direct trustee-to-trustee transfers are tax-free and 60-day rollovers work if you redeposit every dollar (including the 20% withheld, from other funds). Miss the window and it’s a taxable distribution.

IRC §402 · 26 U.S.C. §402

IRC §402: Taxation of Plan Distributions

By Paul D. Diaz, EA, MBA · Updated September 20, 2026

IRC §402 taxes what comes out of qualified plans — ordinary income for pre-tax dollars, with net unrealized appreciation on employer stock and rollover rules as the two great exceptions.

What it governs

Pre-tax distributions taxed as ordinary income in the year received
Net unrealized appreciation: employer stock taxed at capital-gain rates on the growth
Eligible rollover distributions avoid current tax via direct rollover
Lump-sum averaging and grandfather rules for pre-1974 participants (rare, still tested)

In the GuideFull treatment in Chapter 2 of the Guide — THE TAX CUTTERY® Guide to Federal Income Taxation, Professional Edition (564 pages, 24 chapters).

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Questions this section answers

Is my 401(k) withdrawal taxed as capital gains?: No — pre-tax 401(k) distributions are ordinary income, always. The lone capital-gain treatment inside a plan is net unrealized appreciation on employer stock distributed in kind.
What is net unrealized appreciation (NUA)?: Employer stock held in the plan and distributed in kind: you pay ordinary rates only on the plan’s cost basis, and capital-gain rates on all growth when you later sell. It can beat a rollover by five figures.
Do I owe tax on a rollover?: Not on a proper one: direct trustee-to-trustee transfers are tax-free and 60-day rollovers work if you redeposit every dollar (including the 20% withheld, from other funds). Miss the window and it’s a taxable distribution.

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