What are unrealized gains and losses?
An unrealized loss occurs when a stock decreases after an investor buys it, but he or she 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 rose back above the original price, then the investor would have an unrealized gain for the time he or she still holds onto the stock.
Unrealized Loss Versus Gain
For example, say you buy shares in TSJ Sports Conglomerate at $10 per share, and then shortly afterwards the stock's price plummets to $3 per share, but you do not sell. At this point, you have an unrealized loss on this stock of $7 per share, because the value of your position is $7 dollars less than when you first entered into the position. 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).
Realized Gains and Losses
Gains or losses are said to be "realized" when a stock is sold. This is especially important from a tax perspective as, in general, capital gains are taxed only when they are realized. Unrealized gains and losses are also commonly known as "paper" profits or losses, which implies that the gain/loss is only real "on paper." This may be true from a tax perspective, but remember that a loss is a loss, whether it's been realized or not.
Unrealized gains and losses (also commonly referred to as “paper” gains/losses) are the amount you are either up or down on the securities you purchase but have not yet sold. Generally, unrealized gains/losses do not affect you until you actually sell the security and thus, “realize” the gain/loss. When this is done in a personal account, you will then be subject to taxation depending on the circumstances of the transaction.
For example, if you purchased 100 shares of stock “XYZ” for $20 per share and the stock rose to $40 per share, you would have an unrealized gain of $2,000. If you were to sell this position, you’d have a realized gain of $2,000, and be subject to taxation in a personal account.
Many considerations should be made when deciding on what steps to take with positions at a gain or loss. Tax loss harvesting, short/long term capital gain consideration, and your income tax bracket are some of the important factors to consider. For these reasons, it is important to consult with your tax advisor or a Certified Financial Planner® before making any decisions in regards to selling your holdings.
Unrealized gains and losses are simply those amounts that are the result of what a position is worth versus what you paid for it.
For example, if you bought a share of stock at $50 per share, and it's now worth $100, your unrealized gain is $50 per share. If the stock was now worth $10 per share, your unrealized loss is $40 per share.
Realized gains and losses are what get reported to the IRS in a taxable account(versus a tax-deferred or qualified account, like an IRA) when you actually sell the shares. If you sold the shares in our example above, you would REALIZE a gain of $50 per share, or a loss of $40 per share.
When you buy a security, like a stock, the price will fluctuate. If it goes up from your purchase price, you have a gain, if it goes down you have a loss. While you own the security, any gain or loss is just on paper and the term “unrealized” is used to define that fact that you have not actually booked a profit of loss until you sell. Once you sell a security for a gain or loss it’s classified as “realized” and you now have to figure out if you owe tax on the sale or if you can take a deduction for the loss.
I hope that answers your question.
Unrealized gain or loss simply measures the change in the value of an asset since the time you purchased it. For example, if you paid $5,000 to buy 100 shares of stock XYZ in 2014, and today those shares are worth $8,000, you would have an unrealized gain of $3,000. If you sell the shares today, then you would have a realized gain of $3,000. If the shares you sell were held in a taxable account (i.e., not an IRA or 401(k) or other retirement plan), you would need to report the gain on your tax return and possibly pay a capital gains tax. Unrealized gain is not subject to capital gains tax.
In addition to the extremely helpful video from Investopedia, keep in mind:
Whenever an asset is exchanged or sold, the IRS considers that event "realization". Usually whenever realization occurs, "recognition" (the inclusion into taxable income) must occur unless there is an exemption. As long as assets aren't exchanged or sold there is no realization therefore the term "unrealized".
Example: You buy XYZ stock for $1 on Jan 1st and on July 22nd it is worth $10. You have an "unrealized" gain of $9.
Hope this helps!