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.