I've got a 457(f), DC plan where the executive vests in earnings each year. Because they are vested, the earnings get taxed each year. But what about the earnings (that are vested) on the vested earnings already taxed? I know they are not subject to employment taxes under the 3121 regs, but what about income? I can't find any guidance out there. Is it ordinary income or capital gain? I assume it is ordinary income under a plain reading of 457(f). But could it be capital gain taxed at liquidation of the assets, i.e., at distribution. Any thoughts?

Look at Reg. ss 1.457-11(a)(3). Earnings on amounts already vested and taxed are taxed when paid or made available. It's compensation income reported on a W-2 - no way is it capital gains - and I think it would be subject to withholding when taxable.