When one of your investments increases in value, your profit is considered a capital gain…but that capital gain may not need to be reported to the IRS just yet. Capital gains aren’t reported until they’re “realized”—when the investment is sold for a profit.
We asked Ric Edelman, founder of Edelman Financial Engines, what investors need to know about unrealized gains in their portfolios…
What Are Unrealized Gains?
Unrealized gains, also known as “paper profits,” are increases in the value of investments that haven’t yet been sold. Example: If you still own a share of stock that you purchased for $50 but that now trades for $60, you have an unrealized gain of $10. This applies to non-stock investments, as well, including real estate, art and collectibles. Example: If you paid $300,000 for your current home and it’s now worth $500,000, you have an unrealized gain of $200,000.
Some unrealized gains are difficult to quantify. Example: If you own a one-of-a-kind artwork, it’s not really possible to know precisely how much it’s worth until it is sold. Even an expert appraisal is just an estimate.
Unrealized Gains vs. Realized Gains
When an asset is sold for a profit, an unrealized gain becomes a realized gain that should be reported to the IRS. One key difference between realized gains and unrealized gains: Realized gains are locked in, whereas unrealized gains could decrease or even disappear if the asset declines in value before it is sold.
Helpful: If a mutual fund’s manager sells shares of assets owned by the fund, an investor who owns shares of that mutual fund might have realized gains even if he/she doesn’t sell any of his own fund shares.
Do You Pay Tax on Unrealized Gains?
Unrealized gains typically are not taxed. Politicians occasionally raise the possibility of creating unrealized gains taxes, typically as a way to increase taxes paid by the wealthy, but Edelman believes such a tax is not very likely to be implemented. “It would turn out to be too difficult to defend in court and too difficult to administer,” says Edelman. “It’s hard to state what the value of an unsold asset is…how do you value artwork, collectibles, real estate, closely held business interests?”
How Unrealized Gains Affect Your Finances
Unrealized gains might not yet be taxable, but they are worth taking into consideration when doing financial planning.
Examples: Unrealized gains should be included in calculations when evaluating one’s progress toward savings goals, and they could be a factor when determining whether an investment portfolio requires rebalancing. Also: Your brokerage might be willing to loan you money using your overall portfolio value—including unrealized gains—as collateral.
Reporting Requirements: Do You Need to Tell the IRS?
IRS reporting requirements stipulate that realized gains should be reported. It’s almost never necessary to report unrealized gains. Exceptions: Unrealized gains do need to be reported with certain extremely uncommon investments, such as “section 1256 contracts,” which are a specific type of financial derivative that includes some futures contracts, index options and more. Check with your accountant or financial adviser.
What Happens When Gains Become Realized?
Realized gains face capital gains taxes. What capital gains tax rate applies will vary depending on the taxpayer’s income bracket and how long the asset was owned before it was sold.
If the asset was owned for exactly one year or less before being sold, any profit is considered a short-term capital gain and will be taxed at the taxpayer’s ordinary income tax rate.
If the asset was held even one day longer than one year, any profit is a long-term capital gain that is taxed at lower long-term capital gains tax rates. In 2026, the long-term capital gains tax rate is 0% for taxpayers with taxable income up to $98,900, meaning that no tax is incurred. Taxpayers with income over $98,900 pay 15% or 20%, but those rates are still well below these taxpayer’s income tax rates. “I think everyone who owns investments is vaguely familiar with the difference between capital gains tax and income tax,” says Edelman, “but I don’t think they understand the details, and that can be costly.”
Whichever tax rate applies, capital-gains taxes are due on only the profit, not on the investment’s entire sale price. Example: If stock purchased for $50 per share is sold at $60 per share, capital-gains taxes apply only to the $10-per-share profit, not to the entire $60-per-share sales price.
Determining the size of a capital gain can get a bit tricky when shares of an investment were acquired at different times at different prices and only a portion of those holdings are sold. Example: If an investor purchases 100 shares of a stock each month for two years and then sells half of his holdings when the stock price shoots up, the size of the realized capital gain—and whether it’s a short- or long-term capital gain—depends on which of the shares are sold.
Investors typically can choose among several options when deciding which of their shares they wish to sell, including “First-In-First-Out” (FIFO) where the earliest shares purchased are the ones sold…and “Last-In-First-Out” (LIFO), where the most recently acquired shares are the ones sold. Each of these options could produce different tax consequences, so weigh the choices carefully and inform the brokerage of your decision. “You must specify this at the time you do the trade,” says Edelman. “You can’t do it after the fact.”
Practical Tips for Managing Gains and Taxes
Eight potentially useful strategies for lowering capital-gains taxes…
Don’t sell a short-term gain until it becomes a long-term gain
Long-term capital gains tax rates are lower than the income tax rates paid on short-term gains, so holding an appreciated asset for more than a full year can dramatically reduce the resulting tax bill. “We often encounter people who’ve sold an asset that if they’d just waited a few weeks, they would have been able to cut the tax in half,” says Edelman.
Realize capital losses to offset capital gains or to offset income
Investors are taxed on net realized capital gains, so selling investments that have lost value during the same calendar year as investments that have gained value can reduce or eliminate a capital gains tax bill. That strategy is called “tax-loss harvesting.” And in fact, up to $3,000 in capital losses per year can be used to offset ordinary income if realized capital losses exceed gains.
Helpful: Take care to abide by IRS “wash-sale” rules if you want to sell an asset to lock in a capital loss but don’t want to alter your investment portfolio. Wash-sale rules prevent investors from claiming a capital loss if they repurchase the same or “substantially identical” investment within 30 days before or after that sale. If you don’t want to wait out that window, one option is to buy similar-but-not-identical shares instead. “If you sell stock of United, you can buy stock of Delta,” says Edelman. “That’s a similar company, but it’s not the same company.”
Take advantage of the home sale tax exclusion
A married couple is allowed to exclude up to $500,000 in profits from the sale of a home from their taxable capital gains…a single person, up to $250,000. Several requirements must be met to qualify for this exclusion—the home must have been used as a primary residence for at least two of the prior five years, for example—so consult IRS publication 523, Selling Your Home, if the sale of an appreciated residence is in your future…or better yet, seek expert advice. “Talk with a CPA or a tax professional to understand the application of this rule to your circumstances,” advises Edelman.
Sell appreciated assets during low-income years
If you have less income than usual during a particular calendar year, see if you fall into a lower-than-normal capital gains tax bracket as a result. If so, selling profitable investments during this year could reduce or avoid capital gains taxes. These asset sales must occur by December 31—you can’t wait until you’re filling out your tax forms early the following year. Example: A married couple that typically has taxable income of $120,000 per year, which lands in the 15% long-term capital-gains tax bracket, has only $90,000 in taxable income in 2026. Married couples filing jointly who have up to $98,900 in income qualify for the 0% bracket in 2026, so this couple can sell profitable shares and realize up to $8,900 in long-term capital gains by December 31 without incurring federal capital gains taxes.
Donate appreciated assets to charity
If you’re planning to give money to a good cause, consider giving highly appreciated investments instead. Result: You don’t have to pay the capital gains taxes on this investment, and the charity doesn’t have to pay them either, because it’s tax-exempt. Net result: You can give a bigger gift to your favorite cause without digging deeper into your own pocket. “Not only do you avoid a tax, you end up with a bigger tax deduction because the gift to the charity is larger, and the charity ends up with more money,” says Edelman. “Everybody wins—except the IRS.”
Keep it until you die
One way to avoid capital gains taxes is to never sell a highly appreciated asset. Instead, leave the asset to your heirs. Those heirs will receive a “step-up in basis” on the asset, which means the cost basis they use when calculating their own capital gains will be based on the asset’s value at the time of your death or six months following the date, not at the time you originally obtained it. “Your heirs receive your asset without having to pay that capital gains tax,” says Edelman. “This is a big mistake that many people make in their elder years. They don’t realize that holding the asset until death allows their heir to receive it tax-free.”
Let your kids own the assets
Minor children usually have lower capital-gains tax brackets than their parents, so making those kids the official owners of assets, potentially through “Uniform Gifts to Minors Act” (UGMA) accounts, can be a way to reduce or avoid taxes. Speak to a financial planner about navigating the “kiddie tax” rules that apply in these situations and be aware that the child will gain control of the assets when he/she reaches adulthood. “While you may have wanted the money to be used to pay for college,” warns Edelman, “they might want to use the money to pay for a Corvette.”
Take advantage of special rules for company stock
If you have highly appreciated company stock in your 401(k), something known as the “Net Unrealized Appreciation” (NUA) strategy might lower your future capital-gains taxes. “NUA is complex,” says Edelman. “If your employer is offering you stock as part of your compensation, be sure to discuss this with your tax professional.”
