Realized vs. Unrealized Gains
The distinction between gains from assets already sold (realized, taxable) and gains on assets still held (unrealized, not yet taxable).
What is Realized vs. Unrealized Gains?
A realized gain occurs when an asset is sold for more than its cost basis—the transaction is complete and any taxable gain must be reported. An unrealized gain (sometimes called a paper gain) is the increase in value of an asset that is still held; the gain exists on paper but has not been crystallized through a sale. For tax purposes, only realized gains are recognized as taxable income—unrealized gains can accumulate tax-free until the asset is sold. For accounting purposes, the treatment varies: trading securities are marked to market with unrealized gains flowing through the income statement, while unrealized gains on available-for-sale securities and certain hedging instruments are recorded in other comprehensive income (OCI), bypassing net income until realized. The same distinction applies to losses: realized losses are deductible, while unrealized losses are not recognized for tax purposes.
Example
An investor bought 100 shares of a stock at $50 each ($5,000 total). The stock now trades at $80 per share—an unrealized gain of $3,000. If the investor sells, the $3,000 becomes a realized gain and is subject to capital gains tax. If the investor holds the stock in a taxable brokerage account, no tax is owed until the sale occurs.