What Is an Unrealized Gain?

What Is an Unrealized Gain?

Let me tell you directly: an unrealized gain is the increase in the value of an asset that you, as an investor, haven't sold yet. It happens when the current market value of that asset goes above what you originally paid for it or its book value. I call it a 'paper' gain because it's just on paper— an accounting entry— until you actually sell and realize it. The opposite is a paper loss, which is an unrealized loss.

This unrealized gain turns into a realized one only when you sell the asset for a profit. But remember, it can vanish if the asset's value drops below your purchase price before you sell.

How an Unrealized Gain Works

Here's how it operates: an unrealized gain kicks in when the current price of a security is higher than what you paid, including any fees. Many investors, like you might, base their portfolio's current value on these unrealized figures. Generally, capital gains get taxed only when they're realized through a sale.

You could choose to hold onto these gains for tax advantages. If you hold assets for more than a year, they're taxed at the long-term capital gains rate—0%, 15%, or 20% based on your income. Hold for a year or less, and it's ordinary income tax, from 10% to 37%.

Taxes on Realized Gains

When gains become realized, taxes apply. For 2024, if you're a single filer earning up to $47,025, you pay no tax on long-term realized gains; up to $518,900, it's 15%; above that, 20%. In 2025, those thresholds rise to $48,350 and $533,400. Short-term gains? They're taxed at your ordinary rate.

You might decide to delay selling if it pushes you into a higher bracket late in the year. Better to wait until January and factor it into next year's taxes.

Recording Unrealized Gains

Unrealized gains get recorded based on the security type. Held-to-maturity securities aren't on financial statements, though companies might note them in footnotes. Held-for-trading ones are on the balance sheet at fair value, with gains and losses hitting the income statement, affecting net income and EPS.

Available-for-sale securities are also at fair value on the balance sheet, but their unrealized gains and losses go into comprehensive income.

Unrealized Gain vs. Unrealized Loss

The flip side is an unrealized loss, where your investment drops in value but you haven't sold. It's realized only when you close the position at a loss. Both are 'paper' until sold, and market swings can turn a gain into a loss or vice versa.

Example of an Unrealized Gain

Suppose you buy 100 shares of ABC Company at $10 each, and the price rises to $12. You have an unrealized gain of $200 ($2 per share times 100). If you sell at $14, that becomes a realized gain of $400 ($4 per share times 100).

Why Aren’t Unrealized Gains Usually Taxed?

Most unrealized gains aren't taxed because of the realization principle— income is taxed only when received, as ruled in the 1920 Supreme Court case Eisner v. Macomber.

Are There Circumstances Where Unrealized Gains Can Be Taxed?

Yes, exceptions exist. Mark-to-market rules tax certain instruments at current values. Some countries have wealth taxes that hit unrealized gains.

What Is the ‘Step-Up Rule’ with Regard to Unrealized Gains?

The U.S. step-up in basis rule lets heirs inherit at current market value, wiping out unrealized gains. It's controversial as it allows tax-free passage of wealth, with proposals to change it.

Is It Possible to Never Realize an Unrealized Gain?

Absolutely. You could hold forever, pass to heirs, donate to charity for a deduction without realizing, or see the value drop back. In accounts like Roth IRAs, gains grow tax-free without realization.

The Bottom Line

Unrealized gains are paper increases in asset value not yet sold. For instance, buy a stock at $100, it hits $150—you've got $50 unrealized. It's potential profit, taxable only on sale, and can change with markets.