What Are Unrealized Gains & Losses?
A realized gain or loss occurs when an investor sells an asset, with the gain or loss calculated based on the difference between the selling and purchase prices.
Unrealized gains and losses reflect changes in the value of an investment before it is sold.
Tax consequences on gains and losses only occur when the investment is sold.
KEY TAKEAWAYS
- An unrealized gain is an increase in value, and an unrealized loss is a decrease in the value of an asset that an investor has not yet sold.
- A gain or loss on an investment is realized when the asset is sold.
- Capital gains are subject to taxation, and capital losses may be deducted only after the sale of an asset.
Dealing With Unrealized Gains
The value of a financial asset traded in financial markets can change at any time those markets are open for trading.
For example, if Acme Inc. was purchased at $30 per share and the last quoted price is $42, you’re sitting on an unrealized gain of $12 per share.
Unrealized gains and losses are also referred to as paper profits or losses because the gain or loss only exists while the asset is in the investor’s portfolio.
How Capital Gains Are Taxed
When selling assets, calculate the capital gain or loss for each asset.
You pay tax on your net capital gains, which is calculated as follows:
- Total capital gains +
- Minus any capital losses –
- Minus any applicable discounts on your gains –
Australian individuals who have owned an asset for 12 months or more qualify for a 50% capital gains tax discount. This means they pay tax on only half of the net capital gain from the asset.
Can I Invest My Capital Gains to Avoid Paying Taxes?
Certain investments reinvest capital gains, allowing you to defer paying taxes.
For example, capital gains realized from mutual funds or stocks held in a retirement account may be automatically reinvested on a tax-free basis.
This means you don’t have to report them, and they don’t increase your tax burden.
The Bottom Line
Selling an asset may result in a capital gain or loss, depending on whether its value increases or decreases from the original purchase price.
However, you can also experience a gain or loss without disposing of the asset. This is known as an unrealized gain or loss.
You can download the offline guide here What Are Unrealized Gains & Losses Guide
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