Investing Basics · definition
Unrealized Gain (Paper Profit)
An unrealized gain or loss is the change in value of an investment you still hold. It becomes "realized", and usually taxable, only when you sell.
An unrealized gain or loss, informally a paper profit or paper loss, is the difference between what an investment is currently worth and what it cost, for a position you still own. Buy shares for $1,000 that are now quoted at $1,400 and you have a $400 unrealized gain. Sell, and the gain becomes realized.
Key takeaways
- Unrealized means the position is still open; realized means it has been closed by a sale.
- In most tax systems, capital-gains tax applies when gains are realized, not while they accrue (the Netherlands' box 3 regime is a notable exception in transition).
- Paper gains can shrink or vanish before they are ever realized.
- Accounting rules require some institutions to report unrealized changes ("mark to market"), which is how such losses can sink a bank that never sold.
Why the distinction matters
A portfolio statement mixes hard facts (deposits, dividends received) with soft ones (current quotes for open positions). The unrealized part moves daily with markets. Behavioural research, including Shefrin and Statman's "disposition effect", documents that investors treat the two differently: they sell winners too early to "lock in" gains and hold losers too long to avoid making a paper loss real, behaviour that is descriptive of bias rather than of sound rules.
Taxes, in outline
The United States and most European countries tax capital gains on realization, with rates differing by holding period and income. The Netherlands historically taxed a deemed return on net assets instead (box 3), a system being reformed toward actual-return taxation after court rulings. None of this is tax advice: rules differ by country and personal situation, and tax decisions belong with a qualified adviser.
Mark-to-market in institutions
Banks, funds and insurers must value many holdings at market prices each reporting period, flowing unrealized changes through accounts. The 2023 failure of Silicon Valley Bank illustrated the mechanism: unrealized losses on long-dated Treasury and agency securities, crystallised when deposits fled, ended a bank that had not intended to sell.
Frequently asked questions
Is an unrealized gain real money?
It is real in the sense that the market currently prices the position there, and not final in the sense that the price can change before you sell. Both halves of that sentence matter.
Do dividends count as unrealized?
No. A dividend received is cash income, realized by definition. Unrealized refers only to the price change of holdings still owned.
Sources
This entry is for education only. Investing Value describes how financial concepts work; it does not provide investment, tax or legal advice, and nothing here is a recommendation to buy or sell any asset.