What Is the Meaning of Unrealized Gains?

An unrealized gain is the potential profit on an investment that has increased in value but has not yet been sold. This gain is often called a “paper profit” because it exists only in your account statement, not in your bank account. This increase contributes to your net worth on paper, but the value is not locked in and can change with market movements. The gain remains unrealized as long as you continue to hold the asset.

Calculating Unrealized Gains

To calculate an unrealized gain, subtract the asset’s original cost from its current market value. An asset’s original cost, often referred to as the “cost basis,” is not just the purchase price. It also includes any associated costs incurred during the acquisition, such as commissions, brokerage fees, or other transactional expenses.

For example, imagine an investor buys 100 shares of a stock at $50 per share and pays a $10 commission. The total cost basis would be $5,010 (($50 x 100) + $10). If the stock price later increases to $65 per share, the current market value of the holding becomes $6,500. The unrealized gain is calculated as $6,500 (current value) minus $5,010 (cost basis), which equals $1,490.

This same principle applies to other types of assets, such as real estate. Suppose an individual purchases a rental property for $300,000 and pays $10,000 in closing costs, making the cost basis $310,000. If a current appraisal values the property at $375,000, the unrealized gain is $65,000.

The Difference Between Unrealized and Realized Gains

The fundamental distinction between an unrealized and a realized gain is the act of selling or otherwise disposing of the asset. An unrealized gain is hypothetical and remains subject to market fluctuations; today’s paper profit could decrease or even become a loss tomorrow if the asset’s value falls. It is not cash in hand and does not affect your immediate cash flow.

A gain becomes “realized” at the moment the asset is sold. This transaction converts the potential, on-paper profit into actual money or its equivalent. The sale locks in the specific gain amount, which is no longer subject to market changes.

Taxation of Investment Gains

Under current United States federal tax law, unrealized gains are generally not considered taxable income for individuals and do not need to be reported to the IRS. A tax obligation is only created when an investment is sold and the gain is realized. The tax treatment of that realized gain depends entirely on how long the asset was held before being sold.

Gains from assets held for one year or less are classified as short-term capital gains. These are taxed at an individual’s ordinary income tax rates, which are the same rates that apply to wages and other ordinary income. These rates are progressive, meaning they increase with higher levels of income.

Gains from assets held for more than one year are classified as long-term capital gains. These gains receive more favorable tax treatment and are taxed at lower, preferential rates.

How to Track Unrealized Gains

Brokerage firms that hold stocks, bonds, and mutual funds automatically calculate and display this information for their clients. This data is typically found on monthly or quarterly account statements and is available in real-time through the firm’s online portal, often under a “Positions” or “Holdings” tab.

The displayed information usually includes the cost basis, current market value, and the resulting unrealized gain or loss for each individual holding. For assets held outside of a traditional brokerage account, such as physical real estate, art, or collectibles, the responsibility for tracking falls to the owner. Maintaining meticulous personal records of the original purchase price and any associated costs is necessary to accurately calculate the cost basis and any future unrealized or realized gain.