What Are Unrealized Gains and Losses?


Gains or losses are said to be “realized” when a stock (or other investment) that you own is actually sold. Unrealized gains and losses are also commonly known as “paper” profits or losses.

An unrealized loss occurs when a stock decreases after an investor buys it, but has yet to sell it. If a large loss remains unrealized, the investor is probably hoping the stock’s fortunes will turn around and the stock’s worth will increase past the price at which it was purchased. If the stock rises above the original purchase price, then the investor would have an unrealized gain for the time they hold onto the stock.

What Are Unrealized Gains And Losses?

Key Takeaways

  • An unrealized gain is an increase in the value of an asset or investment that an investor holds but has not yet sold for cash, such as an open stock position.
  • An unrealized loss is a decrease in the value of an asset or investment that an investor holds rather than selling it and realizing the loss.
  • Unrealized gains or losses are also known as “paper” profits and losses.
  • A gain or loss becomes realized when the investment is actually sold.
  • Capital gains are taxed only when they are realized and capital losses can only be deducted once they are realized.

Example of Unrealized Gains and Losses

Let’s say you buy shares in TSJ Sports Conglomerate at $10 per share and then shortly afterward the stock’s price plummets to $3 per share. But you do not sell it. At this point, you have an unrealized loss on this stock of $7 per share, because the value of your shares is $7 dollars less than when you first entered into the position.

Now, let’s say the company’s fortunes then shift and the share price soars to $18. Since you have still not sold the stock, you’d now have an unrealized gain of $8 per share ($8 above where you first bought in).

Tax Consequences

Calling unrealized gains and losses “paper” gains or losses implies that the gain/loss is only real “on paper.” This is especially important from a tax perspective as, in general, capital gains are taxed only when they are realized, and you can only deduct capital losses on your tax return after they’re realized too.

To achieve the most tax benefit, you’ll want to be strategic about how you deduct your capital losses. If you have both capital gains and losses in the same year, you can use your capital losses to reduce your tax burden by offsetting your capital gains. A capital loss can also be used to reduce the tax burden of future capital gains. Even if you don’t have capital gains, you can use a capital loss to offset ordinary income up to the allowed amount.

You might be able to take a total capital loss on a stock that you own that has gone to zero because the company went out of business or went bankrupt. A tax professional will be able to advise you on the forms you’ll need to complete and the best strategy for your situation.

Of course, while this is how it works from a tax perspective, remember that a loss is a loss, whether it’s been realized or not. For some investors, learning when to take their gains and cut their losses is the key to long-term investing success.

Advisor Insight

Theodore E. Saade, CFP®, AIF®, CMFC
Signature Estate & Investment Advisors LLC, Los Angeles, CA

Unrealized gains and losses (aka “paper” gains/losses) are the amount you are either up or down on the securities you’ve purchased but not yet sold. Generally, unrealized gains/losses do not affect you until you actually sell the security and thus “realize” the gain/loss. You will then be subject to taxation, assuming the assets were not in a tax-deferred account.

If, say, you bought 100 shares of stock “XYZ” for $20 per share and they rose to $40 per share, you’d have an unrealized gain of $2,000. If you were to sell this position, you’d have a realized gain of $2,000, and owe taxes on it.

Tax-loss harvesting, short/long term capital gain consideration, and your income tax bracket are important factors to consider when deciding on what steps to take with positions at a gain or loss.

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