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.

  1. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
  2. Lock In Profits

    Realizing the gains of a position, such as buying a stock, by ...
  3. Accumulated Other Comprehensive ...

    Expenses, gains, and losses reported in the stockholder’s equity ...
  4. Protective Put

    A risk-management strategy that investors can use to guard against ...
  5. Tax Gain/Loss Harvesting

    Selling securities at a loss to offset a capital gains tax liability. ...
  6. Purchase Price

    The price that an investor pays for a security. This price is ...
Related Articles
  1. Investing

    Keep Your Investing Tax-Efficient With These Tips

    It is prudent to take tax considerations into account when constructing taxable investment portfolios.
  2. Taxes

    Capital Gains Tax 101

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

    Calculating Profits And Losses Of Your Currency Trades

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

    How Does Your Margin Grow?

    Risk-management tool SPAN margin boosts profitability prospects by helping to determine when to exit a trade.
  5. Taxes

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  6. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
  7. Investing

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  8. Trading

    Should Your Options Go Naked?

    Compare naked strategies to credit spreads and see if the unlimited risk of going naked is worth it.
  9. Investing

    The Importance Of Other Comprehensive Income

    Understanding and analyzing OCI greatly improves financial analysis, especially for financial companies.
  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 >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center