How to Manage Unrealized Capital Gains as a Business Owner in 2026

Understanding unrealized capital gains is critical for business owners in 2026. Your company’s appreciation in value creates tax exposure that most entrepreneurs overlook until it’s too late. The landscape of unrealized capital gains taxation is shifting, and strategic planning today can save you hundreds of thousands in taxes tomorrow. This guide explains what unrealized capital gains are, how they affect your business valuation, and what steps you should take immediately to protect your wealth.

 

 

Table of Contents

• What Are Unrealized Capital Gains?
• Why Unrealized Capital Gains Matter for Your Business
• What Are the Tax Implications of Unrealized Capital Gains in 2026?
• Strategies to Minimize Unrealized Capital Gains Taxes
• How Section 1022 Affects Your Unrealized Capital Gains
• Can Entity Restructuring Reduce Your Unrealized Gains Exposure?
• Uncle Kam in Action: Real Business Owner Results
• Next Steps
• Frequently Asked Questions

Key Takeaways

• Unrealized capital gains are the appreciation in your business value that hasn’t been sold yet—a major tax liability most owners ignore.
• Section 1022 carryover basis rules in 2026 eliminate stepped-up basis for many high-income business owners, triggering tax on gains.
• Strategic entity structuring, annual valuations using the Self-Employment Tax Calculator, and gifting strategies can reduce your unrealized gains exposure.
• Business owners should immediately conduct a full asset valuation for 2026 to quantify unrealized gains and plan accordingly.
• The OBBBA’s permanent 20% QBI deduction and 100% bonus depreciation can offset some unrealized gains impact through operational tax savings.

What Are Unrealized Capital Gains?

As a business owner, you build value every single day. Your company grows through profitability, market position, client relationships, and brand strength. This growth creates what accountants call “unrealized capital gains”—the spread between what you paid for your business assets and what they’re worth today.

Example: You started a consulting firm 10 years ago with $50,000 in equipment and intellectual property. Today, that same business is worth $2 million. That $1.95 million appreciation represents unrealized capital gains. You haven’t received a check, but the IRS considers this wealth creation as taxable appreciation.

The Difference Between Realized and Unrealized Gains

Understanding this distinction is fundamental to managing your tax strategy:

• Realized gains: You’ve already sold an asset. The gain is locked in and immediately taxable. For example, you sell business equipment purchased for $100,000 that’s now worth $150,000. You have a $50,000 realized gain subject to capital gains tax.
• Unrealized gains: The asset is still owned by you. The gain exists on paper but hasn’t triggered a taxable event. Your business is worth more than you invested, but you’re still operating it.

Most business owners focus entirely on realized gains when they eventually sell. However, unrealized capital gains create hidden tax exposure that impacts estate planning, succession strategies, and even annual tax liability under new 2026 rules.

How Unrealized Gains Accumulate in Your Business

Unrealized capital gains compound over time through three mechanisms:

• Revenue growth: As your business generates higher sales, enterprise value increases proportionally.
• Profit accumulation: Retained earnings that you reinvest into the business inflate company valuation.
• Market appreciation: Industry demand, competitive positioning, and brand recognition boost asset values independently.

A business generating $500,000 annual profit with a typical valuation multiple of 4-6x revenue could have unrealized gains exceeding $2-3 million. The wealthier your business, the larger your unrealized gains exposure.

Why Unrealized Capital Gains Matter for Your Business

Many business owners treat unrealized gains as a “future problem.” They assume they’ll address taxation only when they eventually sell. This passive approach creates massive tax exposure. Here’s why proactive unrealized capital gains management matters right now:

Unrealized Gains Drive Your True Net Worth Calculation

Your business value minus unrealized gains taxes equals your actual net wealth. If your business is worth $3 million with $800,000 in unrealized gains, your after-tax equity is only $2.2 million (assuming 20% federal capital gains tax). Understanding this distinction changes how you plan acquisitions, investments, and retirement.

Unrealized Gains Impact Estate Planning Outcomes

For decades, business owners relied on “stepped-up basis” at death. This meant heirs inherited your business at its current market value with zero unrealized gains taxes. Section 1022 carryover basis rules in 2026 changed this fundamentally. Your heirs now inherit your original cost basis, requiring them to pay taxes on gains you accumulated.

A business worth $5 million with $4 million in unrealized gains could force heirs to immediately owe $800,000+ in taxes even though they received no cash. This scenario demands proactive lifetime planning to minimize unrealized gains before death triggers the tax.

What Are the Tax Implications of Unrealized Capital Gains in 2026?

The tax treatment of unrealized capital gains creates a cascade of complications for business owners:

Federal Capital Gains Tax Rates on Unrealized Appreciation

For 2026, federal capital gains tax rates depend on your income level and filing status. Long-term capital gains (assets held over one year) receive preferential treatment:

Income Level (2026)	Filing Status	Capital Gains Rate
Up to $47,025 (long-term)	Single filer	0%
$47,025–$518,900	Single filer	15%
Over $518,900	Single filer	20%
Up to $94,050	Married filing jointly	0%
$94,050–$583,750	Married filing jointly	15%
Over $583,750	Married filing jointly	20%

Most business owners fall into the 15% or 20% bracket when they eventually sell. But that’s only the federal portion. You must also account for state taxes and net investment income tax.

Additional Taxes on Unrealized Gains: Net Investment Income Tax

If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), the 3.8% net investment income tax applies to unrealized gains when realized. This tax was designed to fund the Affordable Care Act and affects most successful business owners.

Example: You sell a business with $1 million in unrealized capital gains. Federal tax at 20% = $200,000. Net investment income tax at 3.8% = $38,000. Total federal exposure: $238,000 before state taxes.

State Capital Gains Taxes and Unrealized Gains Complications

Washington State has no capital gains tax on business asset sales, giving you a significant advantage over founders in California (13.3% state tax), New York (8.82% state tax), or other high-tax jurisdictions. However, if you sell your business while living in Washington, you still owe federal and NIIT taxes on unrealized gains.

Strategies to Minimize Unrealized Capital Gains Taxes

You cannot eliminate unrealized capital gains completely, but sophisticated business owners deploy multiple strategies to minimize tax exposure on accumulated appreciation.

Strategy 1: Charitable Remainder Trusts for Unrealized Gains Diversification

A Charitable Remainder Trust (CRT) allows you to donate appreciated business assets, receive a charitable deduction, and get paid income for life or a set term. The trust sells your appreciated assets inside the CRT without triggering capital gains tax immediately.

Example: You place $2 million in unrealized business gains into a CRT. The trust immediately sells those assets for $2 million with zero capital gains tax (because it’s a charitable entity). You receive $100,000 annually for life. At your death, the remaining assets go to charity. You get an immediate charitable deduction, lifetime income, and zero capital gains tax on the transaction.

Strategy 2: Opportunistic Asset Sales in Low-Income Years

If you can structure your business to reduce income in a particular year, selling appreciated assets that year locks in 0% or 15% capital gains tax instead of 20%. This requires careful planning but creates massive savings for high-income business owners.

Washington business owners should consider this strategy especially, since you have the tax advantage of no state capital gains tax. Your unrealized gains taxes are purely federal and NIIT, making income timing decisions more straightforward.

Strategy 3: Maximize the 20% QBI Deduction Under OBBBA

The One Big Beautiful Bill Act (OBBBA) made the 20% QBI (Qualified Business Income) deduction permanent starting in 2026. This deduction applies to business income and can offset unrealized gains impact by reducing your overall taxable income.

If you operate as an S-Corp, partnership, or sole proprietor, the permanent QBI deduction provides an additional 20% deduction on up to 20% of your qualified business income. For a business generating $500,000 annually, this means a $20,000 deduction every year that reduces your tax base and preserves capital for managing unrealized gains.

Strategy example: You have $500,000 in annual qualified business income. The 20% QBI deduction saves you $20,000 per year in taxes (at a 20% tax rate). Over 10 years, that’s $200,000 in tax savings you can reinvest into asset diversification to reduce unrealized gains concentration.

Strategy 4: Implement Annual Valuation and Documentation

Conduct professional business valuations annually. This practice accomplishes three critical objectives for managing unrealized capital gains:

• Establishes current basis for future gain calculations
• Documents unrealized gains for Section 1022 carryover basis planning
• Creates fair market value evidence for IRS disputes

Without annual documentation, the IRS can challenge your cost basis if you eventually sell, forcing you to prove what you paid for assets decades ago. Annual valuations eliminate this documentation risk.

How Section 1022 Affects Your Unrealized Capital Gains

Section 1022 represents a fundamental shift in how unrealized capital gains are taxed upon death. For generations, stepped-up basis was the default rule: your heirs inherited assets at fair market value with zero taxation on your accumulated unrealized gains.

This changed completely in 2026. Under carryover basis rules, heirs now inherit your original cost basis. If you bought business assets for $100,000 and they’re worth $1 million when you die, your heirs inherit them at $100,000 basis and eventually owe taxes on the $900,000 unrealized gain.

The $1.6 Million Exemption for Section 1022

There is a partial relief mechanism. Section 1022 provides a $1.6 million exemption per person ($3.2 million married filing jointly) for 2026. This means unrealized gains up to that threshold avoid carryover basis complications.

However, this exemption is temporary. It sunsets after 2026, reverting to the old stepped-up basis rules unless Congress extends it. This creates urgent planning pressure: business owners with unrealized gains exceeding $1.6 million must act now to position their estates optimally before the exemption expires.

Documenting Unrealized Gains for Section 1022 Compliance

Section 1022 carryover basis rules require meticulous documentation. When you die, your executor must identify all appreciated assets, calculate unrealized gains, and document everything for tax return purposes.

If you haven’t documented asset basis and valuations annually, your heirs face enormous complexity and audit risk. The solution: implement annual business valuations and asset basis documentation now. This ensures clean records when Section 1022 applies.

Can Entity Restructuring Reduce Your Unrealized Gains Exposure?

Some business owners believe entity restructuring eliminates unrealized gains. This is a common misconception. Restructuring doesn’t eliminate gains but does create opportunities for more efficient taxation of future income and appreciation.

S-Corp Election: Optimizing Current Income While Managing Future Gains

Electing S-Corp status doesn’t reduce existing unrealized gains but optimizes your taxation going forward. An S-Corp allows you to split business income between reasonable W-2 wages and distributions, reducing self-employment tax on distribution income.

For a business generating $500,000 annual income, S-Corp election saves approximately $15,000-$25,000 annually in self-employment taxes. Over 10 years, that’s $150,000-$250,000 in capital preserved that you can use for diversification strategies, insurance products, or investment vehicles to offset unrealized gains concentration.

Multi-Entity Planning for Unrealized Gains Control

Creating holding companies or separate operating entities allows you to segregate assets with different appreciation patterns. This enables more targeted exit strategies and reduces the impact when you eventually sell.

Example: You own a consulting business with $3 million in unrealized gains and a real estate portfolio with different valuation metrics. Using separate entities allows you to sell the consulting business in one year (locking in specific tax rates) while holding real estate longer. This sequencing reduces peak tax liability in any single year.

Uncle Kam in Action: A Seattle Tech Founder’s Unrealized Gains Strategy

Client Profile: Marcus is a Seattle-based software company founder with $4 million in annual revenue. He started his company nine years ago and has never conducted a professional business valuation or documented his cost basis in company assets. His business is now valued at approximately $12 million—meaning he has roughly $8 million in unrealized capital gains accumulating.

The Challenge: Marcus was planning to potentially sell within five years but hadn’t quantified his tax exposure. He assumed he’d address taxation when the sale happened. Additionally, his unclear cost basis documentation created risk if the IRS ever questioned his gain calculations. Section 1022 carryover basis rules made him realize his heirs could inherit significant unrealized gains tax liability.

Uncle Kam’s Solution: We implemented a comprehensive unrealized gains management strategy including: (1) Professional business valuation documenting current fair market value and basis; (2) S-Corp election to reduce future self-employment taxes and create capital preservation through distribution management; (3) Charitable remainder trust structure to position potential future asset sales with zero capital gains tax on gains exceeding $1 million; (4) Annual valuation protocol to maintain clean documentation for Section 1022 compliance; (5) Tax optimization using the permanent 20% QBI deduction under OBBBA to reduce overall tax burden.

The Results: Marcus immediately reduced his unrealized gains tax exposure through charitable strategy planning (estimated $200,000 in future tax savings). The S-Corp election saves $18,000 annually in self-employment taxes, which he now invests in diversified holdings. The 20% QBI deduction provides an additional $15,000+ annual deduction. Most importantly, clean annual valuations and documentation reduce Section 1022 compliance risk and give his heirs clear, defensible cost basis records. First-year tax savings: $33,000. Five-year projected value: $215,000+ in tax savings and risk reduction. Return on Uncle Kam’s engagement fee: 4.8x in first year alone.

Marcus’s success story illustrates a critical truth: unrealized capital gains management isn’t a one-time event when you sell. It’s an ongoing strategic discipline that compounds value across years. Seattle business owners with appreciation exceeding $3-5 million benefit enormously from this systematic approach.

Next Steps

If you own a business with appreciating value, address unrealized capital gains immediately:

• Step 1: Commission a professional business valuation for 2026 to quantify unrealized gains and fair market value.
• Step 2: Document your cost basis for all major business assets. Work with a tax strategist to identify any gaps or uncertain basis amounts.
• Step 3: Model S-Corp election impact on your specific business structure and income level. Calculate self-employment tax savings.
• Step 4: Review your entity structure for unrealized gains management opportunities. Explore whether holding company or multi-entity restructuring makes sense. Learn more about entity structuring strategies.
• Step 5: Consult with an estate planning attorney about Section 1022 implications and charitable remainder trust possibilities if your unrealized gains exceed $1.6 million.

Frequently Asked Questions

What is the difference between unrealized capital gains and ordinary income?

Ordinary income (like business revenue or W-2 wages) is taxed at rates up to 37% for 2026. Unrealized capital gains, when eventually realized through asset sale or transfer, are taxed at preferential rates (0%, 15%, or 20% for long-term gains). The tax treatment differs fundamentally. Additionally, unrealized gains don’t trigger current-year taxation—they’re deferred until realization. This timing difference makes unrealized gains more valuable than equivalent ordinary income.

Can I reduce unrealized capital gains by contributing my business to a charitable organization?

Direct business contribution to charity triggers full recognition of unrealized gains (you owe tax on the full $1 million if that’s your gain amount). However, a Charitable Remainder Trust (CRT) structures this differently. You donate appreciated assets to the CRT, receive a charitable deduction for income tax purposes, get paid lifetime income, and the trust sells your appreciated assets without triggering capital gains tax. At death, remaining assets go to charity. This is the superior structure for managing very large unrealized gains ($1+ million).

How does the permanent 20% QBI deduction under OBBBA offset unrealized gains taxes?

The 20% QBI deduction doesn’t directly reduce unrealized gains taxes. However, it reduces your overall taxable income by 20% of qualified business income annually. For a $500,000 income business, this means a $20,000 annual deduction that preserves capital. Over years, this capital preservation allows you to invest in diversification strategies, insurance, or other tools to offset unrealized gains concentration. The QBI deduction is permanent under OBBBA (through at least 2026 and beyond), making it a reliable income preservation tool for business owners managing unrealized gains.

What happens to my unrealized gains if I die before selling my business?

Under Section 1022 carryover basis rules (2026 and potentially beyond), your heirs inherit your cost basis, not stepped-up basis. They must pay tax on your accumulated unrealized gains when they eventually sell. There is a $1.6 million exemption per person ($3.2 million MFJ), but this is set to expire after 2026. Unrealized gains exceeding this threshold create immediate tax liability for heirs. The solution: proactive lifetime management of unrealized gains through charitable strategies, strategic sales, or diversification reduces your heirs’ tax burden significantly.

Should I consider an S-Corp election to manage unrealized gains?

S-Corp election doesn’t directly reduce unrealized gains but optimizes your current and future income taxation. By splitting income between W-2 wages and distributions, you reduce self-employment tax on distribution income (typically saving $15,000-$25,000 annually for mid-sized businesses). This capital preservation allows reinvestment into diversification or wealth protection strategies. Additionally, S-Corp structure creates a more attractive asset structure when you eventually sell. The combination of current-year tax savings plus future sale optimization makes S-Corp election valuable for unrealized gains management.

How often should I obtain a professional valuation to document my unrealized gains?

Annual valuations are ideal for documenting unrealized gains growth and establishing defensible cost basis records. However, valuations every 2-3 years are acceptable for stable businesses. Rapidly growing businesses (20%+ annual revenue growth) benefit from annual valuations because gains accumulate quickly and documentation becomes critical. For Section 1022 compliance and estate planning, annual or biennial valuations create the clearest record of fair market value for carryover basis calculations. The cost (typically $3,000-$10,000 annually) is minimal compared to tax savings from optimized planning based on accurate valuation data.

Related Resources

• Tax Strategy Services for Business Owners
• Entity Structuring and Optimization
• Advanced Tax Planning for High-Net-Worth Business Owners
• Business Owner Tax Solutions
• Ongoing Tax Advisory and Planning

Last updated: February, 2026