Unrealized gains and losses are the changes in an investment’s value while you still own it, measured against what you paid.
The gain or loss exists on paper only, because nothing has been sold, no money has moved, and your brokerage firm recalculates the figure every trading day. If you have been watching an account balance climb for years without ever withdrawing from it, you have been watching unrealized gains.
In this guide, our investment fraud lawyer team will walk you through how unrealized gains and losses work, how to calculate them, and when you pay taxes on them. We also cover how these figures affect your net worth, and when a gain on a statement is a sign that something has gone wrong.
Realized and Unrealized Gains: What Changes When You Sell
Selling is when a gain or loss becomes realized and may have tax consequences. Until then, your portfolio value and your taxable income are two separate figures that move independently of each other. The two figures serve different purposes when you look at your investments and your taxes.
One of them describes how your investments are performing, while the other determines what you owe for the year. The change in value happens continuously, but the tax consequence happens once, on a date you choose by selling. That timing is the one part of the process an investor controls, and it is the reason two people holding the same stock can owe very different amounts.
When a Paper Profit Becomes a Realized Gain
A realized gain is the difference between what the sale brought in and your adjusted basis in the asset. The IRS calculates a capital gain or loss at the point a capital asset is sold or exchanged, rather than at any point while you hold it. Realized gains are generally taxable in the year the transaction occurs, and they are reported on that year’s return.
We want you to understand that a gain becomes taxable when you sell or exchange the asset. That is why a paper profit can exist for years before it becomes a taxable gain. While you still own the investment, the increase in its value is not taxable, but the investment can still generate taxable income.
How Capital Losses Work Once You Sell
Sell below your basis, and the paper loss becomes a realized loss that enters the capital losses calculation on your return. Unrealized losses cannot be deducted, because nothing has been disposed of yet. A net capital loss offsets ordinary income only up to an annual limit set by the IRS, and the remainder carries forward into later years.
Gains and losses from the same tax year are netted against each other first, so a loss taken in December can reduce a gain taken in March. Your statement can show a gain or loss while you hold the investment, but it does not affect your taxes until you sell.
How to Calculate Unrealized Gains and Losses
You may calculate an unrealized gain or loss by subtracting what you paid for an investment from its current market value. Multiply the number of shares you own by the current price, then subtract your total cost. The result is your unrealized gain or loss.
Cost basis is the figure to get right, because reinvested dividends, commissions, and stock splits all move it. A gain reported against the wrong basis is more than a clerical problem, because it is a number you may be making decisions on. If you are reading a statement you no longer trust, checking the cost basis is a reasonable place to start.
You will find a basis figure on your statement, and you are entitled to ask your brokerage firm how it was calculated. The same subtraction applies to every asset you hold, whatever kind of account holds it. It also applies to shares in mutual funds, where the fund’s daily price replaces the stock price you would use for a single company.
Examples of Unrealized Gains and Losses in an Investment Account
Three short examples show how the same subtraction works inside an investment account and outside one, and they are as follows:
- Stock bought at $30 a share that trades at $42 today carries a $12 unrealized gain per share for as long as you hold it.
- Stock bought at $50 a share that trades at $40 today carries a $10 unrealized loss per share, deductible only once you sell.
- A house bought for $220,000 and appraised at $245,000 carries a $25,000 unrealized gain on exactly the same arithmetic.
The same arithmetic runs in reverse, because the $12 unrealized gain becomes an unrealized loss the moment the price falls below what you paid. Those amounts can change as the value of the investment changes, but they are not reported as capital gains or losses on your tax return while you still own it.
Do You Pay Taxes on Unrealized Gains?
You do not pay taxes on an unrealized gain because under current federal rules, a gain is only taxed once you sell.
Unrealized gains do not affect your taxable income until the position is sold, which is why a tax bill can arrive years after the growth did. You do not report unrealized gains to the IRS, and unrealized losses cannot be deducted from your taxes in the year they appear.
A tax professional handles the specifics for your situation, because the holding period and the type of account both change the answer. The potential tax implications of a sale are worth understanding before you place the order rather than afterwards. Proposals to tax unrealized gains surface in political debate from time to time, and none of them describes the rules in force today.
Capital Gains Taxes and How Long You Held the Asset
Capital gains taxes turn on the holding period, and the line the IRS draws is one year. An asset is considered a long-term investment when you hold it for more than a year before selling it. If you sell it within a year of buying it, the gain is short-term. Long-term capital gains are taxed at 0, 15, or 20 percent depending on your taxable income for the year.
Long-term capital gains and short-term capital gains are netted within their own class first, which is why a short-term loss does not automatically cancel a long-term gain.
Short-term capital gains are taxed as ordinary income at graduated rates, which for most investors means a higher bill on the same profit. We recommend checking the exact dates, because the IRS counts the holding period from the day after you acquired the asset through the day you disposed of it. Holding period is one of the few parts of a tax bill an investor can plan around, because you choose the date you sell.
Can You Avoid Paying Taxes When You Sell?
You cannot avoid paying taxes on a gain simply by holding an asset forever, but the timing of a sale is something you control. Tax loss harvesting realizes a loss on purpose to offset gains you have taken elsewhere in the same year. You will lose that deduction under the wash sale rule if you buy substantially identical securities within 30 days before or after the sale.
A disallowed wash sale loss is added to the cost of the new shares, so the deduction is postponed rather than lost. The same figures also shape what your portfolio appears to be worth on any given day.
How Unrealized Gains and Losses Affect Your Net Worth
Unrealized changes move your net worth on paper and move your portfolio’s total value, without moving any cash. A portfolio can gain or lose a large share of its value in a week while your bank balance remains identical.
Market fluctuations can shift a portfolio’s risk balance without a single trade being placed, because a position that grows becomes a larger share of the whole.
Investors track unrealized gains to judge how investments held over several years are performing. If your portfolio looks larger than it did a year ago, the question worth asking is how much of that you could actually withdraw today. Your net worth on paper is only as reliable as the statement it was calculated from.
Sometimes, the amount shown on a statement is far more than the investor can actually recover. For some of the people who come to us, that difference was the whole problem.
When Unrealized Gains on Your Statement Are a Warning Sign
An unrealized gain is a number your brokerage firm presents to you, and on an account that has been mishandled, it is the number that conceals the damage. You are reading a figure that someone else calculated, using prices someone else selected. Large unrealized losses can put investors under pressure to make emotional decisions, especially when a broker continues to recommend holding the position.
None of this means a paper loss is evidence of misconduct, because markets fall on their own for reasons no broker controls. Where the recommendation behind the position was unsuitable from the start, the unrealized figure hides that as well. Two situations come up often enough in our cases to describe on their own, and both involve a gain or a loss that never became real.
Paper Profits That Never Turn Into Cash
A withdrawal request that is met with a reason to wait is worth taking seriously. In a Ponzi scheme, the reported gains are fabricated, and the account holds nothing that could be sold to fund them. The statement shows a growing balance because the operator prints it, and new investor money pays anyone who insists on cashing out.
Investors in these cases often describe years of excellent paper returns followed by a sudden inability to withdraw. The paper profit was never a profit, and the account it appeared on was never funded. Where an account cannot produce cash on demand, the reported gain deserves an explanation.
A Broker Who Keeps Telling You to Hold
Keeping a loss unrealized keeps the position off the trade record and out of a supervisory review. A sale creates a written confirmation that FINRA rules require your firm to send you, a realized loss, and a number that a compliance department can see. Where the investment was unsuitable when it was recommended, a hold recommendation extends the original problem rather than correcting it.
Investors are often told that selling now would lock in the loss, and that is true, but on its own it is not a reason to keep an unsuitable position. Remember that a recommendation to hold is still a recommendation, and it can still form the basis of a claim. Because that is a claim about advice rather than about the market, it goes somewhere specific.
What to Do If Your Losses Came From Bad Advice
Investment losses caused by broker misconduct are pursued in FINRA arbitration rather than in a criminal court. FINRA is the body that regulates broker-dealers and their registered personnel in the United States. Its rules require a member firm to arbitrate a customer dispute when the customer asks for it.
FINRA Rule 12206 makes a claim ineligible for arbitration once six years have elapsed from the event giving rise to it. The rule also states that a dismissal on those grounds does not stop a party from pursuing the claim in court. We will ask you for your account statements, trade confirmations and any written recommendations, because the paper record is what an arbitration panel weighs.
If you are not sure whether what happened to you counts, that is the ordinary position of almost everyone who calls us. The six-year rule is not the only deadline that can apply. Those deadlines run from the event rather than from the day you discovered the problem, which is why waiting is expensive.
What to Remember About Unrealized Gains and Losses
The main points of this guide are as follows:
- An unrealized gain or loss is a change in value on an asset you still own, and it changes nothing until you sell.
- Realized gains are generally taxable in the year of the sale, and unrealized losses cannot be deducted at all.
- The holding period sets the rate, with more than a year treated as long-term and a year or less as short-term.
- Cost basis drives the whole calculation, so a wrong basis produces a wrong gain on an otherwise accurate statement.
- You are entitled to treat a statement as a claim about value, and a claim is worth checking.
Our firm has represented investors in claims like these for over 45 years.
Contact Our Investment Fraud Attorneys
If you have lost money and you are not sure whether the market or the advice caused it, that uncertainty is worth resolving. We understand how devastating this can be, and we will do everything in our power to win you a settlement that recoups your losses.
Here at the Law Offices of Robert Wayne Pearce, P.A., we have 45 years of experience representing investors and have recovered more than $185 million for our clients. Our success rate across litigation, arbitration, and settlements is 99%. We work on a contingency basis, so there is no fee unless we recover for you.
Claims like yours are heard in arbitration rather than in court, and time limits apply to nearly every kind of securities claim. Call us at (800) 732-2889 for a free consultation, speak with our investment fraud lawyers, or read what to expect from FINRA arbitration.
