What Are Unrealized Gains and Losses?

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An unrealized gain or loss is the change in value of an investment you still own, measured against what you paid for it. If the asset is now worth more than its cost, you have an unrealized gain. If it is worth less, you have an unrealized loss. Nothing is locked in until you sell. At that point the gain or loss becomes realized, and in a taxable U.S. account it becomes something you report to the IRS. Until then, the figure moves with the market price, which is why these amounts are often called paper profits and paper losses.

How the figure is calculated

The basic formula for a position is:

Unrealized gain or loss = (current market price − cost basis per unit) × number of units held

Cost basis is usually the purchase price plus transaction costs such as commissions. If you bought shares in several lots at different prices, each lot has its own basis. Your broker may show the total using an average or show each lot separately.

The percentage version, which many brokerage screens display as an unrealized return, is:

Unrealized return (%) = (current value − cost basis) ÷ cost basis × 100

The same logic applies to bonds. If you hold a bond bought at 98 (98% of face value) and it now trades at 103, the unrealized gain is 5 points of face value, before accrued interest, which is tracked separately. Bond prices move inversely to market yields, so a bond held to maturity can show an unrealized loss for years and still repay its full face value at the end. The mechanics are explained in why bond prices fall when interest rates rise.

Example

Assume you buy 100 shares of a hypothetical company at $20 per share, for a cost basis of $2,000 (ignoring fees).

• The price falls to $14. You hold, so you have an unrealized loss of $6 per share, or $600 in total (−30%).
• The price recovers to $35. You still own the shares, so the earlier loss is gone and you now have an unrealized gain of $15 per share, or $1,500 (+75%).
• You sell all 100 shares at $35. The $1,500 becomes a realized gain. If the account is taxable, you report it for the year of the sale.

The $600 loss never existed for tax purposes because you never sold at $14. Only the price on the day you sell, compared with your basis, determines the realized result.

Why the distinction matters before you sell

An unrealized figure is a measurement, not cash. It can reverse in a single trading session, and in a long bear market a large paper gain can shrink to a paper loss without you doing anything. The value of a listed asset changes whenever its market is open.

That does not make the number irrelevant. It tells you what a sale would produce today, which feeds directly into decisions about taxes, rebalancing and risk. A position with a large unrealized gain may now be a bigger share of your portfolio than you intended. A position with an unrealized loss raises a separate question: whether the reasons you bought it still hold, which is a matter for stock analysis rather than for the price chart alone.

How taxes apply in the U.S.

In a regular taxable brokerage account, the IRS taxes gains only after they are realized. You report a capital gain or loss on the return for the year the asset was sold, not the year its value changed.

When you do sell, the holding period sets the rate:

• Short-term: assets held one year or less. Gains are taxed as ordinary income.
• Long-term: assets held more than one year. Gains are taxed at 0%, 15% or 20%, depending on filing status and taxable income. The IRS adjusts the income thresholds for inflation each year.

Realized losses first offset realized gains. If losses exceed gains, up to $3,000 of the net loss ($1,500 if married filing separately) can be deducted against ordinary income each year, and the remainder carries forward to future years. This is the basis of tax-loss harvesting: selling positions with unrealized losses to realize them deliberately and offset gains elsewhere.

The wash sale rule limits that strategy. If you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed for that year and added to the basis of the new shares instead.

Timing therefore has real consequences. Selling a position one day short of the one-year mark can move the entire gain from long-term rates to ordinary income rates.

Exceptions that change the answer

Retirement accounts. In a traditional IRA or 401(k), gains realized inside the account are not taxed when you sell; tax applies when you withdraw, as ordinary income. In a Roth IRA, qualified withdrawals are tax-free. The flip side: losses realized inside these accounts cannot be deducted on your return. The realized-versus-unrealized distinction still exists on your statement, but it has no annual tax effect.

Mutual funds and ETFs. A fund realizes gains when its managers sell holdings, and it must distribute net realized gains to shareholders. In a taxable account you owe tax on those capital gains distributions even if you never sold a single fund share and even if you reinvested the payout. Your own shares can show an unrealized loss in the same year. Reinvested distributions add to your cost basis, which reduces the gain you report when you eventually sell.

Mark-to-market rules. Some positions are taxed as if sold at year-end. Regulated futures contracts and certain other contracts under Section 1256 are marked to market on the last business day of the year, with gains and losses treated as 60% long-term and 40% short-term regardless of holding period. Traders who qualify for and make the Section 475(f) election also mark their trading positions to market annually, with gains and losses treated as ordinary. For these taxpayers, unrealized gains at year-end are taxed.

Inherited assets. When someone dies holding appreciated assets in a taxable account, the heir’s cost basis generally steps up to the asset’s fair market value at the date of death. The unrealized gain built up during the original owner’s lifetime is never taxed as a capital gain. An unrealized loss is likewise erased, because the basis steps down.

How unrealized gains are recorded in accounting

For an individual investor, unrealized gains and losses appear on brokerage statements and account dashboards, usually in a column labeled unrealized P/L or unrealized gain/loss. They are not reported to the IRS.

Companies are different, because accounting standards require many investments to be carried at fair value on the balance sheet. Under U.S. GAAP, the treatment depends on the category:

• Trading securities (debt held for short-term sale): unrealized gains and losses go through the income statement and therefore flow into retained earnings.
• Available-for-sale debt securities: unrealized gains and losses are recorded in other comprehensive income and accumulate in a separate equity account, accumulated other comprehensive income (AOCI). They move to net income when the security is sold.
• Held-to-maturity debt securities: carried at amortized cost, so market-price changes are not recorded as unrealized gains or losses.
• Equity securities with readily determinable fair values: changes in fair value are recognized in net income.

This answers the common question of whether an unrealized gain is an asset or equity. The higher fair value of the investment is the asset. The unrealized gain itself is the offsetting entry, landing either in earnings (and from there in retained earnings) or in AOCI within equity. A typical account name is “Unrealized gain on trading securities” on the income statement or “Unrealized holding gains (losses)” within AOCI.

FAQs

The Bottom Line

Investors with taxable U.S. brokerage accounts benefit most from tracking unrealized gains and losses, because the decision to sell sets both the tax bill and the rate. Check cost basis, holding period and the wash sale rule before acting, since one day can shift a gain from long-term to ordinary income rates. Retirement accounts, fund distributions, mark-to-market rules and inheritance follow different tax rules.