Unrealized Gain/Loss
The paper profit or loss on an investment that has not yet been sold, reflecting the difference between current market value and original cost.
What is Unrealized Gain/Loss?
An unrealized gain or loss is the change in fair value of an asset that is still held—it exists on paper but has not been converted to cash through a sale. For tax purposes, unrealized gains are not taxed; only realized gains (from actual sales) trigger a tax event. For financial reporting, the accounting treatment depends on the asset classification: unrealized gains and losses on trading securities flow through the income statement under GAAP, while those on available-for-sale debt securities bypass net income and are recorded in other comprehensive income (OCI) on the balance sheet until realized. Unrealized gains on equity investments (under ASC 321 for non-controlled stakes) flow through net income for most companies after the 2016 FASB update. Tracking unrealized gains and losses is important for portfolio management, tax planning (timing of sales to manage capital gains), and understanding the gap between a company's book value and the fair value of its investment portfolio.
Example
Berkshire Hathaway holds a large equity portfolio marked to market each quarter. In periods of equity market declines, Berkshire reports massive unrealized losses that flow through its GAAP net income—even though no shares were sold. Warren Buffett regularly notes in shareholder letters that these swings are accounting artifacts, not economic reality, urging investors to focus on operating earnings instead.