Definition:
An Unrealized Gain (also called a paper gain) refers to the increase in the value of an investment that an investor holds but has not yet sold. It represents a potential profit that exists on paper but has not been converted into cash by selling the asset.
How Unrealized Gain Works:
- You buy a stock at $50 per share.
- The current market price rises to $70 per share.
- Your unrealized gain per share is $20 ($70 – $50).
- If you sell at $70, the gain becomes realized.
Importance of Unrealized Gains:
- Reflects current portfolio value changes
- Helps investors monitor performance without triggering taxes
- Used in mark-to-market accounting to value assets on financial statements
- Unrealized gains can turn into losses if the asset price falls
Unrealized Gain vs. Realized Gain:
| Term | Meaning | Tax Implications |
|---|---|---|
| Unrealized Gain | Increase in asset value, not yet sold | No immediate tax |
| Realized Gain | Profit from selling the asset | Usually taxable in the year of sale |
Examples of Unrealized Gains:
- Stocks appreciating in a brokerage account
- Real estate property increasing in market value
- Investment funds with increased NAV (Net Asset Value)
Risks and Considerations:
- Unrealized gains can vanish quickly if markets decline
- Investors may be tempted to hold onto winners too long (risking reversal)
- Important for portfolio rebalancing decisions
Related Terms:
- Realized Gain
- Capital Gains Tax
- Mark-to-Market Accounting
- Portfolio Valuation
- Paper Profit
- Investment Horizon
- Asset Appreciation
- Unrealized Loss
- Net Asset Value (NAV)
- Tax-Deferred Accounts
