Capital gains realized inside a UTMA account are the child’s income, but the Kiddie Tax rules mean that for 2026 only the first $2,700 escapes the parents’ bracket. Above that, the child’s unearned income is taxed at the parents’ rate. That is the short version of how UTMA capital gains are taxed, and the mechanics below fill in the tiers, the reporting, and the traps that catch families every filing season.
The Gains Belong to the Child
Assets in a UTMA legally belong to the minor. The adult is a custodian, not an owner, and the IRS treats income generated inside the account, including realized capital gains, as the child’s income.
Capital gains count as “unearned income” because they come from investments rather than wages. That label matters, because a dependent’s standard deduction against unearned income is only $1,350 for 2026, far below what an independent adult filer gets.1Internal Revenue Service. Rev. Proc. 2025-32 Small gains cross taxable thresholds quickly.
The Three Kiddie Tax Tiers
The Kiddie Tax exists to stop parents from parking investment income in a child’s low bracket. It applies to children under 18, to 18-year-olds whose earned income covers less than half their own support, and to full-time students aged 19 through 23 who meet the same support test.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed If a parent is alive and the child doesn’t file jointly, the rules can reach the account.
For 2026, the child’s unearned income is taxed in three layers:
- First $1,350: covered by the dependent’s standard deduction. No tax.1Internal Revenue Service. Rev. Proc. 2025-32
- Next $1,350: taxed at the child’s own rate, which for a child with no other income is the 10% bracket.
- Everything above $2,700: taxed at the parents’ marginal rate on that type of income.3Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
Take a UTMA that realizes $10,000 in long-term gains during 2026. The first $1,350 is tax-free. The next $1,350 is taxed at the child’s rate. The remaining $7,300 is taxed at the parents’ long-term capital gains rate. For a family in a high bracket, that third tier is where the bill actually shows up.
The parents’ rate is applied by stacking the child’s excess unearned income on top of the parents’ own taxable income, including their wages, business income, and their own investment gains. Stacking can push the child’s gains into a higher bracket than the parents’ last dollar of income alone would suggest.
Long-Term vs. Short-Term Holding Periods
The rate the third tier hits at depends on how long the custodian held the investment. Sold after more than a year: long-term gain, taxed at 0%, 15%, or 20% depending on the parents’ taxable income. For married couples filing jointly in 2026, the 0% rate runs up to $98,900 of taxable income, the 15% rate runs to $613,700, and the 20% rate applies above that.1Internal Revenue Service. Rev. Proc. 2025-32
Sold at a year or less: short-term gain, taxed at the parents’ ordinary income rate, which can reach 37%.4Internal Revenue Service. Federal Income Tax Rates and Brackets The gap between the two schedules can be dramatic, so custodians actively managing a UTMA usually try to hold appreciated positions past the one-year mark before selling.
Reporting the Gains
The brokerage will issue a Form 1099-B for every sale, showing proceeds, cost basis, and whether the gain is short- or long-term.5Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions Those numbers go on the child’s own Form 1040, not the parents’ return.6Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return The gains flow through Schedule D into the 1040, and if the Kiddie Tax applies, Form 8615 is attached to calculate the tax at the parents’ rate.7Internal Revenue Service. Instructions for Form 8615 (2025)
Form 8615 needs the parents’ taxable income and filing status, so the child’s return usually can’t be finished until the parents finish theirs. Plan the sequence.
Form 8814 Doesn’t Cover Sold Securities
Parents sometimes hear they can skip the child’s separate return by reporting the child’s income on their own 1040 using Form 8814. That election exists, but it only covers interest, dividends, and capital gain distributions (the mutual fund kind on Form 1099-DIV). It does not cover realized gains from selling stocks, ETFs, or other securities inside the UTMA.8Internal Revenue Service. Instructions for Form 8814 – Parents’ Election To Report Child’s Interest and Dividends If the child sold anything during the year, the child needs their own return with Form 8615.
Even where 8814 is technically available, it only works when the child’s gross income is under $13,500 for 2026, and it can raise the parents’ AGI enough to phase out other deductions or credits.3Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
When the Child Must File
A dependent must file a return if unearned income exceeds $1,350 for 2026.1Internal Revenue Service. Rev. Proc. 2025-32 A stock bought for $500 and sold for $2,000 clears that line on its own. Small UTMA accounts trigger filing obligations that families routinely miss.
Losses and Wash Sales
Losses realized inside the UTMA offset gains realized in the same year. If losses exceed gains, the child can deduct up to $3,000 of net capital losses against other income per year, with the rest carrying forward.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The wash sale rule applies inside a UTMA the same as anywhere else. Sell at a loss and buy a substantially identical security within 30 days before or after, and the loss is disallowed for the current year.10Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed amount gets added to the basis of the replacement shares, so it isn’t gone forever, just deferred.
Cost Basis, Especially for Gifted-In Shares
The gain is proceeds minus basis, so getting the basis right is half the calculation. When the custodian buys securities with cash inside the UTMA, the basis is the purchase price plus transaction costs. Straightforward.
Gifted-in securities are where families slip up. When a donor transfers appreciated stock into the UTMA, the child inherits the donor’s original basis under the standard gift basis rules. A grandparent who bought at $10 and gifts shares worth $80 into the account leaves the child with a $10 basis. A later sale at $80 produces a $70 gain, even though none of that appreciation happened inside the UTMA.
Keep records of how each position entered the account. The 1099-B will report whatever basis the brokerage has on file, and if that number is wrong, correcting it falls on the custodian.
The 3.8% Net Investment Income Tax
High-income families should watch for the 3.8% net investment income tax. It kicks in when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers, thresholds that are not adjusted for inflation.11Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
On the child’s own return the NIIT rarely applies, because few minors have that kind of MAGI. It becomes a live issue only if parents use Form 8814 (in the narrow cases where it is available), because the child’s income then adds to the parents’ AGI and can push them over the threshold.12Internal Revenue Service. Topic No. 559, Net Investment Income Tax
What Happens When the Account Terminates
UTMAs terminate at the age set by state law, typically 21, though several states use 18 and some allow the donor to specify later. At termination, the custodian transfers full control to the now-adult beneficiary.
The transfer itself is not a taxable event. No gain is triggered by the change from custodial to individual ownership. The cost basis carries over to the adult beneficiary, so built-up appreciation stays unrealized until they sell. Once they do sell, they are filing as an independent taxpayer at their own rates, and the Kiddie Tax no longer applies.