I think it really depends on what looks right to you–and whether you want to reader to know it’s a dream sequence or not.
Italics can be hard to read for some people, so you might want to be careful of that.
Some authors do a break between reality and the start of the dream with *** or something else like that. And then the end of the dream would be signified by *** or the character waking up.
I don’t think there really is a solid answer to this, especially since it largely depends on the context of the story and what makes sense to you as a writer.
Ask yourself:
- Do you want the reader to know that it’s a dream?
- Is it apparent that it’s a dream without signifying it?
- Is it a good dream or a bad dream?
- Is it long enough to qualify as a different section of the chapter?
- How do you want the reader and character to feel about the dream?
- How do you signify thoughts as different from narration and dialogue?
These questions will help you decide how to frame it. The thing about writing is that it’s different for everyone. In one story, it makes sense to do italics, because they use single quotation marks to signify thoughts, but in a story where italics are used for thoughts, it may be confusing for the reader.
How much do you want to differentiate the dream from the rest of the text?
I wish I could give you a more concrete answer, but this is the best I can do without being inside your brain!