Unrealized gains are increases in the value of an asset you still own, and how they are taxed is simple at the core: in most cases, the IRS doesn’t tax them at all until you sell. Your profit stays on paper until a sale converts it into cash, and only then does the holding period decide whether you pay ordinary income rates up to 37% or the lower long-term capital gains rates of 0%, 15%, or 20%. A few situations force recognition before a sale, and a few planning moves can shrink or defer the eventual bill.
What an Unrealized Gain Actually Is
An unrealized gain is the difference between what you paid for an asset and what it’s worth today, when the current price is higher. Buy 100 shares at $50 and watch them climb to $75, and you’re sitting on a $2,500 unrealized gain. Nothing has hit your bank account. The profit exists only on your brokerage statement, which is why people call it a paper gain.
The starting point for any calculation is your cost basis: the purchase price plus what you paid to acquire the asset, including brokerage commissions or closing costs. Current market value minus cost basis equals the unrealized gain, or an unrealized loss if the price fell below what you paid.
Market value is easy to pin down for publicly traded stocks and funds because prices update all day. Real estate requires an appraisal or comparable sales. A stake in a private company relies on the most recent funding round, independent appraisals, or financial modeling. The framework is the same across asset classes, including cryptocurrency, which the IRS treats as property.
The General Rule: No Tax Until You Sell
The IRS does not tax unrealized gains. You can hold an asset that has tripled in value and owe nothing for years, decades, or a lifetime, provided you never sell it. A tax liability is triggered only by a realization event, typically a sale, exchange, or other disposition where you receive cash or property in return.
That rule creates a strong incentive to hold rather than trade. Every sale is a taxable event; every year you keep holding is another year of tax-deferred growth. The moment you sell, the gain becomes realized, gets reported on Form 8949, and flows to Schedule D of your return.1Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets Before that sale, the number can grow, shrink, or vanish. After it, the number is locked.
How Realized Gains Are Taxed
Once you sell, holding period is everything. An asset held one year or less produces a short-term capital gain, taxed at your ordinary income rate. For 2026, the top ordinary rate is 37%, reached at $640,600 in taxable income for single filers and $768,700 for married couples filing jointly.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Anything held longer than a year qualifies for long-term capital gains rates. For 2026, single filers pay:3Tax Foundation. 2026 Capital Gains Tax Rates and Brackets
- 0% on taxable income up to $49,450 ($98,900 married filing jointly)
- 15% on taxable income from $49,451 to $545,500 ($98,901 to $613,700 married filing jointly)
- 20% on taxable income above $545,500 (above $613,700 married filing jointly)
The gap is large enough that selling on day 365 versus day 366 can move the same gain from a 37% rate to a 15% rate.4Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
Higher earners owe an additional 3.8% Net Investment Income Tax on investment income once modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation, so more taxpayers cross them each year.5Internal Revenue Service. Net Investment Income Tax At the top, the effective federal rate on long-term gains reaches 23.8%.
When Unrealized Gains Are Taxed Before a Sale
The hold-and-defer rule has real exceptions. Knowing which ones apply to your holdings prevents surprise bills.
Section 1256 Contracts
Regulated futures contracts, foreign currency contracts, and nonequity options are taxed under mark-to-market rules. At year-end, the IRS treats these positions as if you sold them at fair market value on December 31, and you owe tax on the resulting gain even if you still hold the contract.6Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market The offset is a blended rate regardless of holding period: 60% long-term, 40% short-term.
The Section 475 Trader Election
Securities dealers and qualifying active traders can elect to mark all their positions to market at year-end. Every security is treated as sold on the last business day, and the resulting gains and losses are ordinary income rather than capital gains.7Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities The election is irrevocable without IRS consent.
Mutual Fund Capital Gain Distributions
This one catches many investors off guard. When a mutual fund sells profitable holdings inside the fund, it distributes the resulting capital gains to shareholders. You owe tax on those distributions even if you reinvested every dollar and never sold a share of the fund yourself. The fund reports them on Form 1099-DIV, and they count as long-term regardless of how long you’ve owned your fund shares.8Internal Revenue Service. Mutual Funds – Costs, Distributions, Etc. Index funds and ETFs tend to generate fewer of these because they trade less.
The Expatriation Exit Tax
U.S. citizens and long-term residents who renounce citizenship or terminate residency can face a tax on unrealized gains. A “covered expatriate” is treated as having sold all worldwide assets the day before leaving, triggering tax on the net gain. You become a covered expatriate if your net worth is $2 million or more, your average annual net income tax exceeds $211,000 for the five prior years (2026 threshold), or you can’t certify five years of tax compliance.9Internal Revenue Service. Expatriation Tax The first portion of the net gain is excluded; for 2025 that amount was $890,000, adjusted annually. The tax is reported on Form 8854.10Internal Revenue Service. Instructions for Form 8854 – Initial and Annual Expatriation Statement
The Step-Up in Basis at Death
One rule can erase a lifetime of unrealized gains. When the owner of an appreciated asset dies, the heir’s cost basis resets to fair market value at the date of death instead of the original purchase price. A parent who bought stock for $10,000 thirty years ago and left it worth $200,000 gives the heir a $200,000 basis. Sell that day, and the capital gains tax is zero.11Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
The step-up covers stocks, real estate, business interests, and virtually all inherited property. It’s the reason advisors often suggest that elderly investors hold highly appreciated assets rather than sell during their lifetime. The lifetime tax on that appreciation simply disappears. For larger estates that trigger federal estate tax, the executor files Form 8971 to report values to both the IRS and beneficiaries, and beneficiaries use those figures as their new basis.12Internal Revenue Service. Instructions for Form 8971 and Schedule A
Using Losses to Offset Gains
Unrealized losses work like unrealized gains in reverse: they only matter for tax purposes once you sell. A realized loss offsets a realized gain dollar for dollar. If losses exceed gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and anything beyond that carries forward indefinitely.13Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
A large loss booked in one year can therefore shelter gains for years to come. Watch the wash sale rule when harvesting losses: buying the same or a substantially identical security within 30 days before or after the sale disallows the loss deduction, and the disallowed amount is added to the basis of the replacement shares.14Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities The rule crosses accounts, including IRAs and a spouse’s accounts.
Strategies for Managing the Tax Bill
Planning around unrealized gains is about controlling when and how you realize them, not avoiding tax forever.
Tax-Loss Harvesting
Selling a losing position to offset a winning one is the most common approach. Realize $10,000 in gains, sell a different position for a $10,000 loss, and the tax bill on those gains goes to zero, subject to the wash sale rule above.
Donating Appreciated Assets
Give appreciated stock or other assets to a qualified charity and you avoid the capital gains tax on the appreciation entirely. You also deduct the full fair market value rather than your original cost basis. The asset must have been held for more than one year, and the deduction is capped at 30% of adjusted gross income for most donations of appreciated property to public charities, with a five-year carryforward for any excess.15Internal Revenue Service. Publication 526 – Charitable Contributions
Section 1031 Like-Kind Exchanges
Sell investment or business real estate and roll the proceeds into a similar property, and Section 1031 lets you defer the entire capital gain. The replacement property inherits your original basis, pushing the tax bill forward until you eventually sell without reinvesting. You have 45 days to identify a replacement property and 180 days to complete the exchange. Personal residences and vacation homes do not qualify.16Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
The Primary Residence Exclusion
Selling your main home isn’t quite the same story as selling stock. Up to $250,000 of gain ($500,000 for married couples filing jointly) can be excluded from tax if you meet specific ownership and use requirements.17Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Gain above the exclusion is taxed as a long-term capital gain if you held the home more than a year.
Keeping Cost Basis Records
Everything above depends on accurate basis records. For securities in a brokerage account, your firm tracks cost basis and reports it to the IRS on Form 1099-B when you sell.18FINRA. Cost Basis Basics Verify those figures against your own records for older holdings, gifted shares (which use the donor’s basis), and assets transferred between accounts.
For real estate, basis includes the purchase price, closing costs, and capital improvements over the years, so keep closing statements and improvement receipts for as long as you own the property. Digital assets get closer to stock-style reporting starting in 2026, when brokers must report cost basis on the new Form 1099-DA, though anything held in a private wallet or acquired before broker reporting began is still on you to document.19Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets