What is the Difference Between Realized and Unrealized Gains?

The main difference between realized and unrealized gains lies in whether the investment has been sold for cash or not.

• Realized Gains: These are gains that have been converted into cash. They occur when an investment is sold for a higher price than it was purchased. Realized gains are often subject to capital gains tax, depending on the holding period, and are considered either short-term or long-term gains.
• Unrealized Gains: Also known as "paper" gains, these are theoretical profits that exist on balance, resulting from an investment that has not yet been sold for cash. They are increases in the value of an asset that has yet to be sold for cash, such as a stock position that has increased in value but still remains open. Unrealized gains are typically not taxed.

In summary, the key difference between realized and unrealized gains is that realized gains have been actualized by selling an investment, while unrealized gains are potential profits that exist on paper and have not yet been realized through the sale of the investment.

Comparative Table: Realized vs Unrealized Gains

Here is a table comparing realized and unrealized gains:

In summary, realized gains are profits resulting from the sale of an asset at a price higher than the original purchase price, while unrealized gains reflect changes in the value of an investment before it is sold. Realized gains are reported as income and are subject to capital gains tax, whereas unrealized gains are recorded as "paper profits" and are not taxed by the IRS.