Unrealized gains tax explained: what it is & how it works
An unrealized gain is an increase in an asset’s value, except the asset hasn’t been sold so profits exist only on paper.
An unrealized gains tax would apply before a sale, unlike traditional capital gains taxes.
Most proposals target ultra-wealthy individuals, not ordinary investors or retirement savers.
What are unrealized gains?
Unrealized gains are increases in the value of an asset — such as stock, real estate, or private businesses — that has not yet been sold. Because the asset is still held, the gain exists only “on paper.”
Unrealized vs realized gains
Unrealized gain: An asset has increased in value but is still owned.
Realized gain: The asset has been sold, and the profit is locked in.
Taxes today are generally triggered only when gains are realized through a sale.
Why unrealized gains are not usually taxed
Most tax systems avoid taxing unrealized gains due to two major challenges:
Liquidity concerns: Investors may not have cash available to pay taxes on assets they haven’t sold.
Valuation complexity: Determining fair market value, especially for illiquid assets, can be difficult and subjective.
What is an unrealized gains tax?
An unrealized gains tax is a proposed tax on the increase in value of assets that have not been sold, typically assessed on an annual basis.
How it differs from capital gains tax
Capital gains tax: paid only when an asset is sold.
Unrealized gains tax: would be paid even if the asset is not sold.
This fundamental difference makes unrealized gains taxes far more controversial.
Alternative names you may hear
You may also hear unrealized gains taxes described as:
Mark-to-market tax
Wealth-linked capital gains tax
How an unrealized gains tax would work (in theory)
Annual asset valuation
Assets would be revalued each year to determine whether their value increased or decreased compared to the prior year.
Taxing the increase in value
If the asset value rose, the increase could be taxed, even without a sale or cash transaction.
Treatment of losses
Most proposals include mechanisms allowing losses to:
Offset gains in the same year
Carry forward (or possibly backward) to other tax years
Payment mechanisms
To address liquidity issues, proposals often suggest options such as:
Direct cash payments
Installment plans
Deferral until sale or death (with interest)
Who would an unrealized gains tax apply to?
High-net-worth individuals
Most proposals focus on:
Ultra-wealthy households
Individuals above specific net worth thresholds (often tens or hundreds of millions of dollars)
Types of assets affected
Assets commonly discussed include:
Private business equity
Real estate
Investment funds
Why most proposals exempt ordinary investors
To avoid affecting middle-class households, unrealized gains tax proposals usually target high income or net worth thresholds and generally exclude typical retirement accounts and personal investments.
How unrealized gains are taxed today
Current U.S. tax treatment
Under current U.S. federal law, unrealized gains are not taxed. Taxes are generally due only when an asset is sold and gains are realized.
Exceptions that resemble unrealized gains taxation
Some limited systems resemble unrealized taxation, such as:
Property taxes, which are based on assessed value rather than sale price
Mark-to-market rules for certain professional traders and financial institutions
Arguments in favor of an unrealized gains tax
Addressing wealth inequality
Supporters argue that unrealized gains allow large amounts of wealth to grow untaxed for decades, especially among the richest households.
Preventing tax deferral strategies
Strategies like “buy, borrow, die” — where assets may never be sold and gains may then never be taxed — are often cited as justification.
Increasing tax fairness
Proponents argue that wealthy investors can legally avoid taxes more easily than wage earners whose income is taxed immediately.
Arguments against an unrealized gains tax
Liquidity problems
Taxpayers may owe taxes on assets that generate no cash, which could force them to borrow money or sell off assets.
Valuation challenges
Hard-to-value assets such as private businesses, artwork, or unique real estate introduce complexity and the potential for disputes.
Market volatility and forced sales
Annual taxation during market downturns could encourage selling at unfavorable times.
Constitutional and legal concerns
Some critics argue that taxing unrealized gains may not qualify as “income” under constitutional definitions.
Potential economic and market impacts
Impact on investment behavior
An unrealized gains tax could affect:
Long-term investing strategies
Willingness to take risk
Portfolio diversification
Impact on asset prices
Annual taxation may influence valuation multiples, particularly for growth assets.
Administrative complexity
Both taxpayers and governments could face higher compliance and enforcement costs.
Common misconceptions about unrealized gains tax
“Everyone would pay this tax”
Most proposals apply only to ultra-wealthy individuals, not everyday investors.
“It’s already the law”
In the U.S. and most countries, unrealized gains taxes are not currently law.
“It would replace all other taxes”
An unrealized gains tax would supplement existing tax systems, not replace income or capital gains taxes.
Bottom line
An unrealized gains tax represents a significant departure from traditional tax systems. While supporters see it as a way to reduce long-term tax deferral and address wealth concentration, critics point to liquidity, valuation, and legal concerns. Understanding how it would work and who it would affect can aid in evaluating ongoing policy debates.
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Frequently Asked Questions
The stated purpose is to generally reduce long-term tax deferral and address wealth concentration among the ultra-wealthy.
Most proposals apply only to individuals with very high net worth or income.
Most proposals include mechanisms allowing losses to offset gains over time.
No. A wealth tax applies to total asset value, while an unrealized gains tax would apply only to increases in value.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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