PT - JOURNAL ARTICLE AU - James M. Poterba TI - Unrealized Capital Gains and the Measurement of After-Tax Portfolio Performance AID - 10.3905/jwm.1999.320341 DP - 1999 Jan 31 TA - The Journal of Wealth Management PG - 23--34 VI - 1 IP - 4 4099 - https://pm-research.com/content/1/4/23.short 4100 - https://pm-research.com/content/1/4/23.full AB - While also looking into the issue of after-tax performance measurement, the author focuses more specifically on the taxation of capital gains. A standard approach to after-tax performance measurement assumes that realized capital gains are taxed at their current statutory tax rate while unrealized capital gains are effectively untaxed. Unrealized gains are thus treated in the same way as tax-exempt interest income. The author argues that this ignores the multiperiod aspect of after-tax portfolio planning. He presents a simple algorithm for evaluating the effective capital gains tax burden on realized gains. The solution is based on the probabilities that some portfolio liquidation will be required and that there will be unrealized capital gains in the portfolio at that time. The approach, which suggests that the tax rate on unrealized capital gains is non-zero, clarifies the link between an investor's future likelihood of realizing capital gains, and the current effective capital gains tax burden on realized gains.