How UTMA Capital Gains Are Taxed: Tiers, Kiddie Tax, NIIT

Capital gains realized inside a UTMA account are taxed as the child’s unearned income, but the Kiddie Tax rules push most of that gain onto the parents’ rate schedule. For 2026, the first $1,350 is covered by the dependent’s standard deduction, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed as if the parents earned it.¹ The mechanics are simple once you see the tiers; the reporting is where families trip.

The Three Tiers for 2026

Assets inside a UTMA legally belong to the minor, so every realized gain is the child’s income, not the custodian’s or the parents’. Because the gain comes from investments rather than wages, it counts as unearned income, and a dependent’s standard deduction against unearned income is only $1,350 for 2026.²

The stack for 2026 works like this:

First $1,350: covered by the dependent’s standard deduction, no tax.²
Next $1,350: taxed at the child’s own rate, which for a child with no other income is the 10% bracket.
Above $2,700: taxed at the parents’ marginal rate.¹

A worked example. Suppose a UTMA realizes $10,000 in long-term capital gains during 2026. The first $1,350 is tax-free. The next $1,350 is taxed at the child’s rate. The remaining $7,300 is taxed at whatever long-term capital gains rate applies to the parents’ income. That third tier is where the real cost lives.

The parents’ rate is applied by stacking the child’s excess unearned income on top of all the parents’ own income, including wages and their own investment gains. That stacking can push the child’s gains into a higher bracket than the parents’ own last dollar would suggest.

Long-Term vs. Short-Term Rates at Tier Three

Holding period decides which rate schedule the top tier lands on. More than one year is long-term; one year or less is short-term.

Long-term gains falling into the third tier are taxed at the parents’ long-term capital gains rate, which is 0%, 15%, or 20% depending on the parents’ taxable income. For 2026, married couples filing jointly hit the breakpoints here:²

0% rate: taxable income up to $98,900
15% rate: $98,901 to $613,700
20% rate: above $613,700

For single filers, the 15% rate begins above $49,450 and the 20% rate above $545,500.² Short-term gains get no preferential rate. They are taxed at the parents’ ordinary income rate, which reaches 37% at the top.³ For an actively managed UTMA, holding appreciated positions for at least a year before selling can change the tax bill dramatically when the parents sit in a high bracket.

Who the Kiddie Tax Applies To

The Kiddie Tax applies to children under 18, to 18-year-olds whose earned income covers less than half their own support, and to full-time students aged 19 through 23 who meet that same support test.⁴ It applies if at least one parent is alive and the child doesn’t file a joint return. Once the child no longer meets any of those tests, unearned income is taxed at the child’s own rates without the parental stacking.

Reporting the Gains

The brokerage holding the UTMA reports every sale on Form 1099-B, showing proceeds, cost basis, and whether the gain is short-term or long-term.⁵ The 1099-B is issued in the child’s name and Social Security number, and the gains are reported on the child’s own Form 1040, not the parents’.⁶

The gains flow through Schedule D and into the child’s 1040. If the Kiddie Tax applies, the child attaches Form 8615, which does the actual math at the parents’ rate.⁷ Form 8615 requires the parents’ taxable income and filing status, so the child’s return usually can’t be finished until the parents finish theirs. Plan the sequence early; families run into trouble when they leave both returns until April.

Why Form 8814 Usually Doesn’t Help

Parents sometimes hear they can skip a separate return by reporting the child’s income on their own 1040 with Form 8814. That election exists, but it only covers interest, dividends, and capital gain distributions of the kind reported on Form 1099-DIV. It does not cover realized capital gains from selling stocks, ETFs, or other securities inside the UTMA.⁸ If the custodian sold anything in the account during the year, the child needs a return with Form 8615 attached.

The election also requires the child’s gross income to stay under $13,500 for 2026, and using it raises the parents’ AGI, which can phase out other deductions or credits.¹

When a Dependent Must File

A dependent child must file a federal return once unearned income exceeds $1,350 for 2026.² A single modest sale can cross that line. A stock bought for $500 and sold for $2,000 produces a $1,500 gain, and that alone triggers a filing requirement. Small UTMA accounts often owe returns that families don’t realize they owe.

Cost Basis Is Where People Get It Wrong

The gain is the difference between what the custodian paid and what the security sold for, so an incorrect basis inflates the reported gain and the tax.

When the custodian buys securities with cash inside the UTMA, the basis is the purchase price plus transaction costs. Straightforward. The trap is gifted stock: when a donor transfers appreciated shares into the UTMA, the child inherits the donor’s original basis under the standard gift basis rules. If a grandparent bought shares at $10 and gifts them into the UTMA when they’re worth $80, the child’s basis stays at $10. A later sale at $80 produces a $70 taxable gain.

Keep records of how each position entered the account. The brokerage’s 1099-B will report whatever basis is in its system, and if that number is wrong for gifted assets, the custodian has to correct it.

Losses and Wash Sales

Losses realized inside the UTMA offset gains realized in the same year. If losses exceed gains, the child can deduct up to $3,000 of net capital losses against other income per year, with the remainder carrying forward.⁹

The wash sale rule applies inside a UTMA the same way it applies anywhere else. If the custodian sells at a loss and buys a substantially identical security within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement shares.¹⁰

The Net Investment Income Tax

The 3.8% net investment income tax kicks in when modified AGI exceeds $200,000 for single filers or $250,000 for married couples filing jointly, thresholds that are not adjusted for inflation.¹¹ On the child’s return, NIIT rarely applies, because few minors approach those numbers. But in the limited situations where a Form 8814 election is available, moving the child’s income onto the parents’ return can push the parents over the threshold and create NIIT that wouldn’t exist otherwise.¹²

One Boundary Worth Knowing

Handing the account over when the child reaches the age of majority is not a taxable event. No gain is triggered by the change from custodial to individual ownership, and the original cost basis carries to the now-adult owner. If the custodian bought a stock at $100 and it’s worth $500 when the account terminates, the beneficiary keeps the $100 basis and the built-up $400 gain is taxed only when the beneficiary eventually sells, under their own rates and outside the Kiddie Tax.

1
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
2
Internal Revenue Service. Rev. Proc. 2025-32
3
Internal Revenue Service. Federal Income Tax Rates and Brackets
4
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
5
Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
6
Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return
7
Internal Revenue Service. Instructions for Form 8615 (2025)
8
Internal Revenue Service. Instructions for Form 8814 – Parents’ Election To Report Child’s Interest and Dividends
9
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
10
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
11
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
12
Internal Revenue Service. Topic No. 559, Net Investment Income Tax