What are unrealized gains and what is unrealized gains tax

Key takeaways:

• Unrealized gains are profits on investments or assets that have increased in value but haven't been sold yet.
• While unrealized gains can boost your net worth on paper, their value can change with market fluctuations.
• Unrealized gains don’t affect your available cash or income until you sell the asset.
• Unrealized gains are not considered income and are not taxed until they are realized.
• You do not need to report unrealized gains to the IRS since no transaction has occurred.
• Realized gains happen when an asset is sold, and the profit becomes taxable.
• There is currently no tax on unrealized gains.
• President Biden’s fiscal 2025 budget proposal includes a tax on unrealized gains for high-income individuals, but congress has not passed the budget yet.

What are unrealized gains?

Unrealized gains happen when the market value of an asset exceeds the original purchase price but hasn’t been sold yet. These gains are often referred to as "paper profits" because they only exist on paper until the asset is sold. When you sell an asset that’s gained value over time, that unrealized gain becomes a realized gain, which means you’ve officially locked in the profit.

Unrealized gains can apply to many types of investments, including stocks, real estate, bonds, and mutual funds. Even collectibles, like art, antiques, baseball cards, or comic books, can gain unrealized value as their market value fluctuates.

If they only exist on paper, why do unrealized gains matter?

Unrealized gains don't immediately affect your taxable income, but they still play a significant role in your financial strategy. For example, if you're tracking your overall net worth or investment portfolio performance, unrealized gains will give you an idea of how your assets are growing in value. They can also help guide decisions on whether to hold or sell an investment.

Unrealized gains are not forever

The market can change, and the value of your investment may drop. If the value drops enough, your unrealized gain may disappear completely. This is a risk inherent to investing. Gains are never guaranteed until they are realized through a sale. Volatility, which is defined as rapid change in market prices, can turn an unrealized gain into an unrealized loss in a short period of time.

An example of unrealized gains

Let’s say you bought a house in 2020 for $220,000. You recently got it appraised, and it is now worth $245,000. That means your house has gained $25,000 in unrealized value.

This doesn’t mean that you suddenly have an extra $25,000 to spend. That profit is an unrealized gain that only exists on paper, and you’ll have to sell your home if you want to cash in on it. Additionally, the value of your house could fluctuate. If the housing market crashes or dips, the $25,000 in paper profits could evaporate, potentially leaving you with less than you originally invested.

Do you count unrealized gains as income?

No, you do not count unrealized gains as income since the profit is only on paper and doesn’t really exist until you sell the asset. If the value of your investment declines, that gain may be erased. This means you are not currently taxed on your unrealized gains. Realized gains, on the other hand, are taxed.

While unrealized gains do not count as income, they may affect other financial decisions, like borrowing against your investment or using it as collateral. For instance, some people take out loans using the increased value of their stock or property holdings as collateral, even though those gains haven't been realized yet.

Do you report unrealized gains to IRS?

No, you do not need to report any unrealized gains to the IRS because no actual transaction has taken place. Taxes are only assessed when a gain is realized by selling the asset. In other words, as long as the gain remains unrealized, it has no current tax implications.

What is the difference between unrealized gains and realized gains? 

As we mentioned, unrealized gains are paper gains, meaning you haven’t sold the asset yet. When you sell the asset or investment, the unrealized gain becomes realized, and you make a profit. This is called a capital gain.

What is unrealized gains tax?

There is no current unrealized gains tax. After you sell an asset that’s gained value, it becomes realized and therefore subject to tax. 

If you’re selling an investment you’ve held onto for more than a year, currently, you’ll be required to pay long-term capital gains tax at a 0%, 15%, or 20% rate, depending on your income. On the other hand, any investment you’ve held for less than a year will be taxed at your normal tax rate.

Because long-term capital gains tax rates are typically lower than standard federal rates, many investors choose to hold onto assets for at least a year. This strategy is known as tax-loss harvesting, where investors strategically sell assets to minimize taxes and offset capital gains with capital losses.

Have questions or concerns about unrealized gains and how they impact your taxes? Work with a Jackson Hewitt Tax Pro to get the answers you need. You don’t have to wait until tax time to book an appointment. We’re here all year. Schedule your appointment today!

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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