An unrealized gain and loss is something every investor, even a business, must consider when determining the value of their investment.

What is an Unrealized Gain?

An unrealized gain is when a security’s price goes up or down from the time it was acquired. You may have these assets as a business owner or investor. For example, if you purchase 1,000 shares in a supplier and the value goes up 100%, this is an unrealized gain.

an unrealized gain

Gains and losses are only experienced when a sale is made.

You may have an unrealized gain if the shares go up until you sell it, then the gain is realized. A good example of this is:

  • Purchase 1,000 shares of Company A for $10 each ($10,000 total investment)
  • Shares increase to $15 per share, meaning the total value of the stocks, if sold, would be $15,000

In this case, you have a “profit” of $15,000 – $10,000 = $5,000. However, you have yet to realize this profit. You can also have a loss.

Let’s assume that you still made a $10,000 investment, but the shares are now worth $8,000. You would have an unrealized loss of $2,000 in this case.

Are Unrealized Gains Subject to Taxation?

No – not yet. The investment will be unrealized because you’ve yet to sell it, so you don’t miss out on any of the profits or losses. In essence, you made the initial investment and haven’t been made any better or worse for it.

However, once you sell the asset or share, you may or may not have to pay taxes on it.

If you have held the share for over one year, you will be subject to long-term capital gains. Long-term capital gains will be taxed at one of the following rates:

  • 0%
  • 15%
  • 20%

However, if you sell the asset in under one year, the profits will be seen as ordinary income. Depending on your tax bracket, this can mean paying 10% – 37% on the profits you earn from the gain.

Is unrealized gain taxable if you have a loss?

If the share or asset were to decline in value and you sell it, you can also claim a long-term capital gain loss. There are restrictions in place as to how much you can deduct as a loss in this case, so it’s something to discuss with an accountant who will know how to best lower your tax burden.

Realized Vs. Unrealized Gain

Realized Vs. Unrealized Gain

As a business owner, it’s important to realize that unrealized gains will not show up on your cash flow statement, even if you use a tool like Cash Flow Frog. With that said, the main difference between the two are:

  • Realized gains are when the asset is sold
  • Unrealized gains are when the asset remains unsold

When you have unrealized gains, they’re “gains” on paper only and will only be realized upon sale.

The Calculation of Unrealized Gain

Calculating your unrealized gain will require you to have the following data:

  • Number of shares
  • Price of each share when purchased
  • Current share price

For example, you may have purchased 10 shares of a company at $100 each, or $1,000 in total investment. Let’s assume that the shares would sell for $150 each if you sold them today, or $1,500.

In this case, you would not have a net profit of $1,500.

Instead, your net profit would be $500 – your initial investment or $1,000. Based on these figures, your realized gain when sold would be $500. For tax purposes, it’s crucial that this calculation is followed precisely so that you never pay more on your taxes than is legally required.

Why Does Tracking Unrealized Gains Matter?

Understanding your liquidity and how much cash you would have if you sold your investments is important. You always want to know how much liquidity you have, and this is why it’s important to have a way to track your unrealized gains or losses.

Unrealized Gains Matter

You should routinely review investments to find when it may be in your best interest to sell or hold an asset.

In Conclusion

Understanding the difference between a realized gain vs unrealized gain is important for every business owner or investor to learn. It’s important for you to have a way to understand the value change of an investment or asset.

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