Loading the player...

What is an 'Unrealized Gain'

An unrealized gain is a profit that exists on paper, resulting from an investment. It is a profitable position that has yet to be sold in return for cash, such as a stock position that has increased in capital gains but still remains open. A gain becomes realized once the position is closed for a profit.

BREAKING DOWN 'Unrealized Gain'

Unrealized gains often come about due to a specific decision by an investor. When unrealized gains present, it usually means an investor believes the investment has room for higher future gains. Additionally, unrealized gains sometimes come about because holding an investment for an extended time period lowers the tax burden of the gain. For example, if an investor holds a stock for longer than one year, his tax rate is reduced to the long-term capital gains tax. Further, if an investor wants to move the capital gains tax burden to another tax year, he can sell the stock in January of a proceeding year, rather than selling in the current year.

Difference Between Unrealized Gain and Unrealized Loss

The opposite of an unrealized gain is an unrealized loss. This type of loss occurs when an investor holds onto a losing investment, such as a stock that has dropped in value since the position was opened. Similar to an unrealized gain, a loss becomes realized once the position is closed for a loss. Unrealized gains and unrealized losses are often called "paper" profits or losses since the actual gain or loss is not determined until the position is closed.

A position with an unrealized gain may eventually turn into a position with an unrealized loss as the market fluctuates, and vice versa. An unrealized gain occurs when the current price of a security is higher than the price the investor initially paid for the security, net of brokerage fees. Many investors calculate the current value of their investment portfolios based on unrealized values. In general, capital gains are taxed only when they become realized.

An Example of an Unrealized Gain

Many corporations carry unrealized gains on their balance sheets. For example, Carnival Corporation, a cruise line company, reported Q2 2016 earnings that included unrealized gains. The gains came from unsold fuel derivatives, such as futures and forward contracts, that were used to hedge the fluctuating price of fuel. It is fairly common for companies such as Carnival to have unrealized gains or losses because businesses that rely on fuel, such as airline companies, use derivatives to hedge rising expenses.

Carnival Corporation reported GAAP net income of $605 million for Q2 2016. Of that net income, $242 million is attributable to the unrealized gain of fuel derivatives. Adjusted net income was $370 million for the same period, which omits unrealized gains, among other things.

RELATED TERMS
  1. Unrealized Loss

    A loss that results from holding onto an asset after it has decreased ...
  2. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
  3. Accumulated Other Comprehensive ...

    Expenses, gains, and losses reported in the stockholder’s equity ...
  4. Lock In Profits

    Realizing the gains of a position, such as buying a stock, by ...
  5. Paper Profit (Paper Loss)

    Unrealized capital gain (or capital loss) in an investment. It ...
  6. Pyramiding

    A method of increasing a position size by using unrealized profits ...
Related Articles
  1. Taxes

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  2. Managing Wealth

    What Are Unrealized Gains And Losses?

    Gains or losses become “realized” when the stock is sold.
  3. Investing

    What's Accumulated Other Comprehensive Income?

    Accumulated other comprehensive income lists gains and losses a firm has yet to settle.
  4. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  5. Financial Advisor

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
  6. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  7. Trading

    The Art Of Cutting Your Losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  8. Trading

    Calculating Profits And Losses Of Your Currency Trades

    The forex is a risky market, and traders must always remain alert about their trade positions. Learn how to keep on top of your currency trades.
  9. Investing

    Seek Out Past Losses To Uncover Future Gains

    Tax loss carry-forwards can help reduce the tax burden of owning a profitable fund.
  10. Managing Wealth

    Understanding the Capital Gains Tax

    A capital gains tax is imposed on the profits realized when an investor or corporation sells an asset for a higher price than its purchase price.
RELATED FAQS
  1. How can I tell if I'm an emotional investor?

    Successful investors possess the important trait of emotional stability, which means that they base their investment decisions ... Read Answer >>
  2. How are realized profits different from unrealized or so-called "paper" profits?

    When buying and selling assets for profit, it is important for investors to differentiate between realized profits and gains, ... Read Answer >>
  3. You currently own a mutual fund with a Net Asset Value (NAV) of $11.25 ...

    The correct answer is d In mutual funds, the NAV is the total value of the fund's portfolio less liabilities. The NAV is ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center