Does Any Country Tax Unrealized Capital Gains?

Capital gains refer to the profit an individual earns from selling an asset for more than its purchase price. These assets can include stocks, real estate, or other investments. Taxation distinguishes between “realized” and “unrealized” capital gains. Most tax systems levy taxes only when a gain is realized through a sale or disposition, but exceptions exist. This article explores whether any countries tax unrealized capital gains and the mechanisms they employ.

Understanding Unrealized vs. Realized Capital Gains Taxation

A capital gain becomes “realized” when an asset is sold or exchanged, converting its increased value into cash or another economic benefit. This is the standard taxable event for capital gains, providing the asset holder with liquidity to pay the associated tax. The clear valuation at the time of sale also simplifies tax calculation.

Conversely, “unrealized” gains represent the theoretical profit an asset holder would make if they sold the asset at its current market value. These are called “paper gains” because the increase in value has not yet been converted into cash. Taxing unrealized gains presents practical challenges, including difficulty valuing assets not actively traded and lack of immediate liquidity for the owner to pay the tax. Market fluctuations could also erase these paper gains before they are realized.

Despite the principle of taxing only realized gains, some countries deviate from this rule. These policies aim to address tax avoidance concerns or broaden the tax base. Such exceptions lay the groundwork for policies that effectively tax wealth accumulation, even if assets have not been formally sold.

Key Tax Mechanisms Affecting Unrealized Gains

Countries that tax unrealized gains employ specific mechanisms. One is “deemed disposition,” where a tax event is triggered as if an asset were sold, even without an actual sale. This occurs when events, such as a taxpayer emigrating, result in the asset being treated as if sold for its fair market value. The gain is then calculated based on this “deemed” sale, leading to a tax liability on the unrealized appreciation.

Another mechanism is “wealth taxes.” These are annual taxes levied on an individual’s total net worth, including assets like real estate, investments, and other valuables. Since these taxes are based on the current market value of assets, they inherently capture and tax the unrealized appreciation of those assets. While not a direct capital gains tax, wealth taxes achieve a similar outcome by taxing accumulated value, regardless of whether assets have been sold.

Exit taxes represent a specific form of deemed disposition. These taxes apply when an individual formally renounces citizenship or long-term residency in a country. The individual’s worldwide assets are “marked to market,” treated as if sold at fair market value on the day before expatriation. Any unrealized gains are then taxed as if realized, preventing individuals from avoiding future capital gains taxes by moving to a jurisdiction with more favorable tax laws.

Global Examples of Unrealized Gain Taxation

Several countries implement tax mechanisms that capture unrealized capital gains. Canada, for instance, has deemed disposition rules that can trigger taxation on unrealized gains when an individual ceases to be a resident, treating most capital property as if sold at fair market value upon emigration. Upon death, Canada’s tax system deems all capital property disposed of at fair market value immediately prior to death, potentially leading to taxation on unrealized gains in the deceased’s final tax return. A change in property use, such as converting a rental property to a principal residence, can also trigger a deemed disposition in Canada.

Wealth taxes are levied in several nations. Norway imposes an annual wealth tax on an individual’s worldwide net wealth above a certain threshold, approximately NOK 1.76 million (around $170,000) for 2025. The combined municipal and state wealth tax rate in Norway can reach up to 1.1% on net wealth. Switzerland also applies wealth taxes at the cantonal and municipal levels, with rates varying significantly by location, ranging from 0.1% to 1% on worldwide assets, excluding foreign real estate.

Spain levies an annual wealth tax on the net value of an individual’s assets, with a national tax-free allowance of €700,000 and a €300,000 exemption for the main residence. Regional rates and exemptions can differ. Spain also introduced a temporary “Solidarity Tax on Large Fortunes” in 2023 for net wealth exceeding €3 million, applied uniformly across the country.

The United States utilizes an exit tax for certain individuals who renounce U.S. citizenship or terminate long-term residency. This tax, under Internal Revenue Code Section 877A, applies to “covered expatriates” with a net worth of $2 million or more, or whose average annual net income tax liability for the five years prior to expatriation exceeds an inflation-adjusted amount. Covered expatriates are treated as if they sold all worldwide assets for fair market value on the day before expatriation, with any gains above an exclusion amount (approximately $850,000 for 2025) subject to capital gains tax. Australia and South Africa also have similar exit tax provisions that treat assets as if disposed of upon an individual ceasing tax residency, aiming to tax accrued gains.