An unrealized gain is the increase in value of an investment you still own — the gap between what you paid and what it’s worth right now. Because you haven’t sold, the profit exists only on paper, and under federal tax law you generally owe nothing on unrealized gains until you actually sell the asset.
That single distinction between paper profit and realized profit drives a lot of everyday tax planning: when to sell a stock, whether to gift appreciated shares or leave them to heirs, and how to handle losses you’d like to deduct.
What an Unrealized Gain Is
An unrealized gain shows up any time the current market price of something you own is higher than the price you paid. Buy shares for $5,000, watch them climb to $8,000, and you’re sitting on a $3,000 unrealized gain. “Unrealized” just means you haven’t turned that paper profit into cash by selling. Your net worth is higher. You can’t spend the gain until you close the position.
The number floats. A strong quarter can push it higher; a bad week can shrink it or wipe it out. That floating quality is what separates unrealized from realized gains. The moment you sell, the gain locks in and real tax consequences follow.
How to Calculate an Unrealized Gain
The math is simple: current fair market value minus your cost basis. A positive result is an unrealized gain, a negative result an unrealized loss.
Cost Basis
Your cost basis is the total you invested to acquire the asset — the purchase price plus transaction costs like brokerage commissions or transfer fees. That figure is the starting line for measuring future profit or loss.
Fair Market Value
Fair market value is what a willing buyer would pay a willing seller in an open transaction today. For publicly traded stock, this updates continuously while markets are open. For less liquid assets like real estate, you may need an appraisal.
Adjustments From Stock Splits and Corporate Actions
Splits, mergers, and similar events change your per-share basis without changing your total investment. In a two-for-one split, you end up with twice as many shares, but the total basis stays the same and gets divided across the larger share count. If you held 100 shares at $10 each ($1,000 basis), you’d hold 200 shares at $5 each afterward, still $1,000 total.1Internal Revenue Service. Stocks (Options, Splits, Traders) Skipping this adjustment overstates the per-share gain.
Why Unrealized Gains Aren’t Taxed
Federal tax law generally requires a “realization event” before investment growth becomes taxable income. Gain from property is measured as the excess of what you receive from a sale or other disposition over your adjusted basis.2Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss Treasury regulations put it more concretely: gain is realized when property is converted into cash or exchanged for other property differing materially in kind or extent.3eCFR. 26 CFR 1.1001-1 – Computation of Gain or Loss Without that triggering transaction, there’s no taxable event.
The Supreme Court’s 2024 decision in Moore v. United States touched on this and deliberately left it open. The Court upheld a tax on a foreign corporation’s undistributed earnings attributed to American shareholders, but stressed that the income had been realized by the corporation itself. Whether Congress can tax unrealized appreciation was, the Court said, “an issue for another day.”4Supreme Court of the United States. Moore v. United States, 602 U.S. ___ (2024) For now, the working rule stands: if you haven’t sold, you don’t owe federal income tax on the gain.
What Happens When You Sell
Sell for more than your basis and the gain becomes realized and taxable. How much you owe depends on how long you held.
Short-Term Capital Gains
Hold an asset one year or less before selling and the profit is taxed as ordinary income, at the same rates that apply to wages.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses Depending on your bracket, that can reach 37 percent for 2026.
Long-Term Capital Gains
Hold for more than a year and the gain qualifies for lower long-term rates. For 2026, those rates are 0, 15, or 20 percent, based on taxable income and filing status:6Internal Revenue Service. Revenue Procedure 2025-32
- 0 percent: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15 percent: income above those thresholds up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
- 20 percent: income above the 15-percent ceiling.
The size of that short-term vs. long-term spread is one of the main reasons investors sit tight on a gain until they’ve crossed the one-year mark.
Net Investment Income Tax
Higher earners may owe an additional 3.8 percent net investment income tax on realized gains. It applies to the lesser of net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).7Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds aren’t indexed for inflation, so more taxpayers cross them as incomes rise.
When Gains Get Taxed Without a Sale
A few situations force you to recognize a gain even though you didn’t actually sell.
Section 1256 Contracts
Regulated futures contracts, foreign currency contracts, and nonequity options fall under a mandatory mark-to-market rule. At the close of each tax year, these contracts are treated as sold at fair market value on the last business day of the year, and any resulting gain or loss goes on that year’s return.8Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market The gain or loss is split 60 percent long-term and 40 percent short-term, no matter how long you actually held the contract.
Trader Election Under Section 475(f)
Taxpayers who qualify as traders in securities or commodities (not casual investors) can elect mark-to-market treatment. Once made, the election requires all securities held in connection with the trading business to be treated as sold at fair market value on the last day of the tax year. It binds all future years unless the IRS grants revocation. Securities held for personal investment are excluded if identified in the trader’s records before the close of the acquisition day.
Unrealized Gains in Gifted and Inherited Assets
Two of the most common ways an asset changes hands outside a market sale — gifts and inheritances — produce very different results.
Gifts: Carryover Basis
Receive an asset as a gift and you generally take over the donor’s original basis. If a parent bought stock for $2,000 and gave it to you when it was worth $10,000, your basis stays $2,000. Whenever you sell, you owe tax on the full difference between the sale price and $2,000, including the appreciation that built up while the donor held it.9Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust One exception: if the fair market value at the time of the gift was lower than the donor’s basis, your basis for calculating a loss is that lower fair market value, so donors can’t shift paper losses to recipients in higher brackets.
Inheritance: Step-Up in Basis
Inherit an asset and the basis resets to fair market value on the date of death. If a relative bought stock decades ago for $5,000 and it was worth $100,000 when they died, your basis becomes $100,000.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent All $95,000 of unrealized gain that accumulated during the decedent’s lifetime is permanently wiped out for income tax purposes. Sell shortly after for $100,000 and you owe zero capital gains tax. That step-up is one of the biggest tax benefits in the federal code and a reason some investors decide to hold heavily appreciated assets rather than sell during life.
How Unrealized Gains Behave in Different Accounts
Standard Brokerage Accounts
Unrealized gains on stocks and funds update throughout each trading day. A position might rise 15 percent on strong earnings and give some of it back the following week. None of that is taxable while the shares stay in the account. Mutual funds add a wrinkle: when a fund manager sells holdings inside the fund at a profit, the fund distributes taxable capital gains to shareholders even though the shareholders themselves didn’t sell.
Real Estate
Property values shift with local economies, rates, and development. An appraisal may show $80,000 of appreciation, but it stays unrealized until the sale closes. Homeowners who sell a primary residence can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they meet ownership and use requirements.
Digital Assets
The IRS treats cryptocurrency and other digital assets as property, so the same realization rules apply.11Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions Holding Bitcoin that has tripled creates an unrealized gain. Selling it, swapping it for another coin, or spending it on goods or services triggers realization. Fair market value is measured in U.S. dollars at the moment of the transaction.
Retirement Accounts
Investments inside a traditional 401(k) or IRA grow tax-deferred. You don’t report unrealized or realized gains each year. Contributions and earnings stay untaxed until you take a distribution, at which point withdrawals are taxed as ordinary income. In a Roth IRA or Roth 401(k), qualified withdrawals come out entirely tax-free, so gains that accumulated inside the account may never be taxed at all. Within these accounts, the unrealized vs. realized distinction is largely irrelevant.
Unrealized Losses and the Wash Sale Rule
The same logic applies in reverse. If your $5,000 investment drops to $3,500, you have a $1,500 unrealized loss. You can’t deduct it while you still hold the asset. Once you sell, net capital losses can offset capital gains dollar for dollar, and any remaining net loss can reduce ordinary income by up to $3,000 per year ($1,500 if married filing separately), with the rest carried forward.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Investors who want to harvest a loss for tax purposes have to watch the wash sale rule. Sell an investment at a loss and buy the same or a substantially identical security within 30 days before or after the sale, and the IRS disallows the loss.12Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities The disallowed loss gets added to the basis of the replacement shares, so the benefit isn’t lost forever, just deferred until you sell those replacement shares in a qualifying transaction.
The window covers 61 calendar days: the 30 days before, the sale date, and the 30 days after. It also applies to purchases in an IRA or Roth IRA during that window.13Internal Revenue Service. Instructions for Schedule D (Form 1040) To harvest a loss cleanly, either wait out the 61 days or replace the security with something similar but not substantially identical.
State Taxes on Realized Gains
Federal treatment is only part of the picture. Most states tax realized capital gains as ordinary income, with rates ranging from zero in states with no income tax to over 13 percent in the highest-tax states. Some states exempt certain categories of gain or apply preferential rates. The combined federal-plus-state rate is what determines how much of a realized gain you actually keep.