What are unrealized capital gains?

On Behalf of | Jun 17, 2022 | Tax Issues

Capital gains reflect profits an investor receives after selling an asset. Someone who buys a home in Pennsylvania for $150,000 and sells it for $175,000 may have a capital gains tax due. The same could be true when buying and selling stocks. For tax purposes, those concerned about capital gains may wonder about the difference between realized and unrealized gains.

Unrealized vs. realized capital gains

The value of stocks may increase or decrease at any given time. Although the value might increase, the gain remains unrealized if the person does not sell the asset. The same applies to losses, which may also be unrealized. After selling the asset, the gain or loss becomes realized.

Taxes do not apply to unrealized gains. However, once sold, the gains become taxable. Similarly, the seller cannot take a deduction for a loss until after the asset’s sale. So, no deductions for unrealized losses.

Those filing tax returns may face requirements to pay obligations based on their realized gains. Be mindful that the laws related to capital gains taxes are subject to change.

Dealing with tax requirements

Various tax issues may arise when someone files a return. Those who forget to include capital gains taxes owed could receive a tax bill in the mail. Some could face a potential audit. Ensuring a return is complete and accurate may cut down on the chances of problems. If the taxpayer discovers a mistake after filing the return, submitting an amended return might be necessary.

Those who undergo an audit may potentially counter the IRS’s inquiry with compelling evidence. Even if the IRS’s initial response is not favorable, appeals and legal options could remain.