Unrealized Gains and Losses: Understanding Paper Profits and Losses

Unrealized gains (or losses) refer to the changes in the value of an investment that have not yet been realized, or sold, by the investor. In other words, they are the gains or losses that are "paper" profits or losses, meaning they exist only on paper and have not yet been converted into cash.

For example, let's say you buy 100 shares of a stock for $50 per share, and the stock price later increases to $75 per share. Your unrealized gain would be $25 per share, or $2,500 total (100 shares x $25 per share). This means that if you were to sell all 100 shares at the current market price of $75 per share, you would realize a profit of $2,500.

On the other hand, if the stock price decreases to $40 per share, your unrealized loss would be $3,500 (100 shares x $35 per share). This means that if you were to sell all 100 shares at the current market price of $40 per share, you would realize a loss of $3,500.

It's important to note that unrealized gains and losses are not actual profits or losses until they are realized through the sale of the investment. Therefore, they do not affect your tax liability until they are realized.