What to Do With Unrealized Gains: Strategies to Consider

Investments can grow in value over time, leading to unrealized gains—profits that exist on paper but haven’t been locked in through a sale. Deciding what to do with these gains is an important financial decision, as different strategies affect taxes, portfolio performance, and long-term wealth-building goals.

Holding Positions Without Realizing

Keeping an investment without selling can be a strategic choice for long-term growth and tax efficiency. Assets held for over a year qualify for lower long-term capital gains tax rates, which in 2024 range from 0% to 20% based on taxable income. Delaying a sale defers taxes and allows capital to compound, potentially leading to greater wealth accumulation.

Market conditions influence whether holding is beneficial. Selling too soon can mean missing out on further gains, particularly with high-growth stocks where companies reinvest earnings to expand. Investors who sold Nvidia or Tesla shares early in past years missed substantial price increases. Holding also helps during market volatility, as short-term fluctuations may not reflect an asset’s true value.

Beyond appreciation, holding can provide financial benefits. Some stocks pay dividends, offering income without requiring a sale. Qualified dividends are taxed at the same favorable rates as long-term capital gains. Real estate investments generate rental income while appreciating, allowing investors to benefit from both cash flow and price growth.

Timing Realization Events

When to sell an investment affects returns and taxes. Selling in a high-income year can result in a larger tax bill, while waiting for a lower-income year may reduce the tax rate on gains. An investor nearing retirement, for example, might delay selling until taxable income drops, taking advantage of a lower capital gains bracket.

Economic conditions also play a role. If interest rates are expected to decline, equity markets may rally, making it beneficial to hold off on selling. Conversely, if indicators suggest a slowdown, locking in profits before a downturn can protect gains. Monitoring Federal Reserve policies, inflation trends, and corporate earnings reports helps investors make informed decisions.

Tax law changes can also impact timing. If a capital gains tax increase is set to take effect the following year, selling beforehand could result in a lower tax bill. Staying informed about legislative changes allows investors to act proactively.

Offsetting Gains With Losses

Tax-loss harvesting helps reduce taxable income by using investment losses to offset gains. The IRS allows capital losses to be deducted against capital gains dollar-for-dollar. If losses exceed gains, up to $3,000 can be deducted against ordinary income, with any excess carried forward to future years. This strategy is useful for investors who have realized significant profits and want to reduce their tax burden.

Choosing which assets to sell for tax-loss harvesting requires careful consideration. Selling underperforming investments that no longer align with long-term objectives can both reduce taxable gains and reallocate funds into better opportunities. However, the IRS wash-sale rule disallows claiming a loss if the same or a substantially identical security is repurchased within 30 days before or after the sale. To maintain market exposure while avoiding this rule, investors may reinvest in similar but not identical assets, such as an ETF tracking the same sector instead of the individual stock that was sold.

Tax-loss harvesting can also apply to mutual funds and ETFs. Some funds distribute capital gains at year-end, creating unexpected taxable events. Offsetting these distributions with harvested losses can help manage tax obligations. This is especially relevant for actively managed funds, where higher turnover rates lead to more frequent taxable events. Investors holding such funds in taxable accounts should review year-end distribution estimates to determine if loss harvesting could be beneficial.

Reallocating Capital

After realizing gains, reinvesting proceeds into different assets can help maintain portfolio growth while managing risk. Depending on financial goals, investors may shift capital into new asset classes, diversify with fixed income, or explore alternative investments.

Shifting to Different Asset Classes

Reallocating capital into alternative asset classes can enhance diversification and reduce exposure to market volatility. Investors who have realized gains from equities may consider commodities, real estate, or private equity. Real estate investment trusts (REITs) provide exposure to property markets without direct ownership, offering both income and potential appreciation. Commodities like gold or oil can serve as hedges against inflation, particularly during periods of monetary policy uncertainty.

Tax treatment varies across asset classes, influencing after-tax returns. Gains from collectibles, such as art or rare coins, are taxed at a maximum rate of 28%, compared to the 20% maximum for long-term capital gains on stocks. Private equity investments, often structured as limited partnerships, may generate income taxed at ordinary rates but can also provide tax advantages through carried interest treatment or depreciation deductions. Understanding these nuances helps investors optimize their reallocation strategy.

Diversifying With Fixed Income

Fixed-income securities offer stability and predictable returns, making them an attractive option for investors looking to preserve capital after realizing gains. U.S. Treasury bonds, municipal bonds, and corporate bonds each have distinct risk and tax implications. Municipal bonds provide tax-exempt interest income at the federal level and potentially at the state level if purchased within the investor’s home state, which can be advantageous for high-income individuals.

Duration and credit quality are key factors when selecting fixed-income investments. Long-term bonds are more sensitive to interest rate changes, while short-term bonds offer lower volatility. Investors concerned about rising rates may prefer Treasury Inflation-Protected Securities (TIPS), which adjust principal value based on inflation. Corporate bonds with higher credit ratings provide lower yields but greater security, whereas high-yield bonds offer higher returns at the cost of increased default risk.

Exploring Non-Equity Opportunities

Beyond traditional stocks and bonds, alternative investments such as hedge funds, venture capital, and structured products can provide unique return profiles. Hedge funds employ strategies like long-short equity, global macro, and arbitrage to generate returns uncorrelated with broader markets. These funds often require high minimum investments and charge performance fees.

Venture capital and private credit offer exposure to early-stage companies and non-traditional lending markets. These investments typically have longer lock-up periods but can yield substantial returns if successful. Structured products, such as market-linked CDs or equity-linked notes, combine elements of fixed income and derivatives to provide customized risk-return profiles. Investors should assess liquidity constraints, regulatory considerations, and tax implications before committing capital to these alternatives.

Borrowing Against Gains

Instead of selling investments and triggering taxes, some investors borrow against their unrealized gains. This allows access to liquidity while keeping assets invested. Loans backed by securities, such as margin loans or securities-based lines of credit (SBLOCs), offer flexibility but come with risks.

Margin loans let investors borrow against brokerage account holdings, typically at lower interest rates than personal loans. However, they require maintaining a minimum equity level. If the pledged securities decline significantly, a margin call may force the investor to deposit additional funds or sell assets at an inopportune time. SBLOCs function similarly but are structured as revolving credit lines, often used for short-term liquidity needs like real estate purchases or business expenses.

For those with concentrated stock positions, borrowing against shares can provide diversification opportunities without immediately selling. High-net-worth individuals often use structured lending solutions, such as non-recourse loans, which limit personal liability to the pledged securities. Interest on loans used for investment purposes may also be tax-deductible, subject to IRS limitations. However, the cost of borrowing should be weighed against potential investment returns, as rising interest rates can erode the benefits of this strategy. Maintaining a conservative loan-to-value ratio helps avoid forced liquidation during market downturns.

Gifting Shares as an Option

Transferring appreciated securities to family members or charitable organizations can be a tax-efficient way to manage unrealized gains while supporting personal or philanthropic goals. Gifting shares instead of selling them allows the recipient to assume the cost basis, potentially benefiting from lower tax rates.

For individuals passing wealth to family members, gifting stock can be advantageous when the recipient is in a lower tax bracket. In 2024, the annual gift tax exclusion allows up to $18,000 per recipient without triggering federal gift tax reporting. If a parent gifts shares to a child with little taxable income, the child may qualify for the 0% long-term capital gains rate on a future sale. However, the “kiddie tax” applies to unearned income above $2,600 for minors, potentially subjecting gains to their parents’ tax rates.

Charitable donations of appreciated securities allow donors to avoid capital gains taxes while claiming a deduction for the fair market value of the shares. Donor-advised funds (DAFs) provide additional flexibility, enabling individuals to contribute securities, receive an immediate tax deduction, and distribute funds to charities over time.