What are unrealized gains and losses?

When you hold a stock and sell it for a profit or at a loss, that’s your capital gain or loss. But what about the unrealized gains and losses that are heard commonly? This article will help you understand what’s unrealized and realized.

What are realized gains and losses?

The act of selling stock makes them realized. Whether you sell the stock for a profit or at a loss, it’s a realized gain or loss. 

Unrealized capital gains and losses

The opposite, or when you don’t do anything and keep holding the stock, remain unrealized. Assume you purchased a stock for $100, and now it’s valued at $120. In that case, you have an unrealized capital gain worth $20. The same also happens when the price is down. Is it valued at $80? That’s an unrealized capital loss worth $20.

Having said that, the difference between realized and unrealized capital gains is pretty obvious.

Though there aren’t many tax implications of unrealized capital gains and losses, the unrealized capital losses, then, can be used to offset capital gains. 

Benefits of unrealized capital losses

When there is a fair amount of unrealized capital loss, and you don’t anticipate it going up, rather than “realizing” them, you can hold off and use it in the future to offset capital gains. This can reduce the capital tax rate that applies to your earnings.

Plus, it gives you a reason to hold the stock in hopes it will gain traction, and you will get close to what you initially invested. Even if you realize more capital loss than originally planned, you can use them for future tax seasons to balance even more capital gains, which leads to you paying less tax in the end.