Unrealized capital gains: Meaning and tax

Unrealized capital gains are the profits you see on paper when the value of your investment increases, but you haven’t sold it yet. We’ll break down what these “paper profits” mean to your finances and the effect they could have on your taxes.

What are unrealized capital gains?

Seeing an investment rise in value is thrilling—it feels like money in the bank. But if you haven’t sold the asset, you’re looking at potential profit rather than actual profit. These unrealized capital gains look good on paper, but until the investment is sold, it’s not a sure thing. The amount can continue to go up, or it could go down, based on the market. Although unrealized gains aren’t set in stone, understanding their value and what they mean to your finances is important.

What are capital gains and what does it mean to realize them?

While this article focuses on unrealized gains, let’s take a moment to consider capital gains in general. Capital gains are the profits you receive when you sell property for more than you paid. These gains are only realized when the asset is sold, and you collect payment—in contrast to unrealized gains, which represent the amount you might receive when you finally sell it.

Examples of unrealized gains and losses

Any appreciating asset—mutual funds, real estate, fine art, collectibles, etc.—can be subject to unrealized capital gain or loss. Unrealized gains or losses are calculated by subtracting the original cost of the asset (what you paid for it) from its present value. If the difference is positive, it’s an unrealized gain. If it’s negative, it’s an unrealized loss.

Present Value - Asset Cost = Unrealized Capital Gain or Loss

For example, if you purchase stock in a company at $30 per share, and the value increases to $35 per share, you have unrealized gains of $5 per share ($35 - $30 = $5). In the case of a loss, imagine someone bought a home for $350,000 but due to a market slump, similar properties are now selling for around $300,000. In this scenario, they have experienced an unrealized loss of $50,000 ($300,000 - $350,000 = ($50,000)). Both examples represent unrealized changes. The gain or loss only becomes “real” when the asset is sold.

Are unrealized capital gains taxed?

In the U.S., unrealized gains are generally not taxed. Realized gains, on the other hand, are taxed in the year they are realized—meaning when the asset is sold. Because unrealized gains are not taxed, there is no need to declare them on your income tax. Similarly, unrealized losses cannot be deducted. 

 Although unrealized gains and losses are only changes on paper and are not considered for capital gains tax purposes, monitoring them is well worth it. They are a means of evaluating your investment strategy and can help you decide if an investment is worth holding onto. If you determine that the investment should be sold, capital gains taxes can help you pinpoint the most advantageous time to sell.

Unrealized capital gains tax: real estate

While you don’t pay taxes on unrealized capital gains on your home, your property taxes are based on your home’s assessed value. This means that as the value of your home goes up, your property tax obligation may also increase.

Once real estate is sold, and the gain has been realized, that profit becomes taxable. However, there are instances where you may be able to avoid taxation on real estate gains. If the property sold is your primary residence (you lived in the home for at least two of the past five years), you may be able to avoid paying taxes on a portion of the gain.

Tax breaks are also available for inherited properties. When you inherit a property, its cost basis is stepped-up to the fair market value at the time of the original owner’s death. This means you’re not on the hook for any appreciation that occurred during their lifetime. For example, let’s say you inherit a property from a relative. The property is worth $500,000 today, but your relative bought it for $250,000. When you receive the property, the cost basis will be stepped-up to $500,000, which is the current fair market value. Therefore, there will be no gains to report. When you sell the property, your cost basis of $500,000 will shield you from the fact that the property doubled in value before it was left to you.

Related: What is inheritance and is it taxable?

For investment properties, the 1031 exchange rule allows you to defer capital gains tax when you sell one investment property and reinvest the money into another similar property, effectively exchanging one property for the other. Several conditions such as location and time limitations apply.

Mutual fund unrealized gains

Like unrealized gains in general, the unrealized gains on mutual funds are not taxable. However, if the fund issues a dividend or the fund’s manager sells shares within the fund for more than they were purchased, you may be responsible for paying taxes on the gain. The fund should send you a 1099-DIV form with information about the distribution so you can file your taxes accordingly. 

 Some exceptions are available. For example, when qualified small business stock is held for five years, you may not have to pay capital gains tax on the increase. Qualified small businesses include U.S. domestic C corporations with gross assets up to $50 million ($75 million after July 4, 2025), among other requirements. Interest income from government bonds like municipal bonds may also be exempt.

Countries that tax unrealized capital gains

Most countries do not tax unrealized gains. However, Denmark and Norway tax unrealized gains in the form of exit taxes. When investment shares or ownership rights are taken out of the country by foreign investors, those investors must pay taxes on the unrealized gains.* 

Are unrealized losses tax-deductible?

Unrealized losses are not deductible because they are losses that only occur on paper. This is similar to the reasoning that exempts unrealized capital gains from being taxed.

Can you benefit from unrealized capital gains?

Although you must sell an asset to realize capital gains on it and make a profit, you can use this property as collateral on a loan. For example, as your house or stock increases in value, the amount you can borrow against them may also increase. Unrealized gains can have a positive effect on your net worth as well. As your home increases in value, this increase is factored into your net worth calculation. However, if the value of stock you own decreases, that will also affect your net worth.

How are capital gains taxed and reported?

Capital gains are reported on your tax returns as either short-term or long-term capital gains, depending on whether you held the shares for a year or less (short-term) or more than a year (long-term). Short-term gains are taxed as ordinary income according to your income bracket. The rate can go as high as 37%. Long-term gains are taxed at lower rates to encourage longer-term investing. Long-term rates can be 0% (if your income is low enough), 15%, or 20%. Both types of capital gains are reported on IRS Form 1040 (Schedule D) Capital Gains and Losses. It is advised that you consult a tax professional to ensure you have the correct forms and file correctly.

How do you minimize capital gains tax

Certain tax strategies can help you minimize capital gains tax. These include:

Tax-loss harvesting — In order to lighten tax obligations, some investors practice tax-loss harvesting where realized gains are offset with the losses that come from selling other assets. For example, the gains of $20,000 from the sale of one stock can be offset by the $10,000 loss of another stock.

 Prioritizing long-term investing — Long-term capital gains are taxed at a lower rate than short-term investments, so holding an investment for more than a year can save you money. 

 Tax-advantaged accounts — Tax-advantaged accounts like IRAs and 401(k)s offer tax-deferred growth. Because Roth IRAs are funded with after-tax dollars, gains are not taxed when distributions are taken, provided applicable requirements are met. A 529 college savings plan also provides tax advantages. You don’t pay income taxes or capital gains tax on the profits if the funds are used for qualified education expenses.

 Donations to charitable organizations — Donating appreciating assets to qualifying charities can help minimize capital gains taxes. You won’t have to pay taxes on the proceeds of a sale, and if you itemize, you may be able to deduct a portion of the donated item’s value.

Understanding the nuances of capital gains and knowing when they become taxable can help you plan and manage your financial strategy.

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*Lake, Rebecca. “What is the Unrealized Capital Gains Tax Proposal?” SoFi.com, March 18, 2025