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What are Unrealized Gains and Losses?

Investing money into stocks and bonds naturally leads to unrealized gains and losses. An increasing number of investors is managing their wealth and investments independently. In 2023, 61 percent of adults in the US invested in the stock market, and that number is expected to grow. 

When your investments grow or shrink, but you choose not to sell them, this is considered an unrealized gain or loss, depending on how your investment performs. 

But what exactly does that mean for you as an investor? And what does it mean to have unrealized gains or losses? In this article, we’ll cover everything you need to know, from explaining how they work to covering tax implications. Let’s dive in! 

What are Unrealized Gains and Losses?

Unrealized gains refer to the money you’ve made through investments you currently hold. On the other hand, unrealized losses refer to the money you’ve lost through different investments that have not been sold. 

Simply put, until you actually sell the investment, it will continue to be considered an unrealized gain or loss. Once you sell your investments, they’re considered realized gains or losses.

How Unrealized Gains and Losses Work

As mentioned above, you won’t lose or make any money on your unrealized gains and losses until the asset is sold. So, if you have an unrealized loss and hold onto it, the stock price could turn about, and it could eventually become an unrealized gain or vice versa.

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If you have an unrealized gain and decide to sell, you must pay taxes on that asset. The exact amount will depend on how long you’ve held onto that asset. Typically, if you’ve held an asset for more than a year, you’ll pay long-term capital gains – whereas if you owned it for less than a year, you’d be liable for paying a short-term capital gains tax on your earnings.

If you have an unrealized loss and choose to sell, you can use this to offset your gains or ensure you won’t lose any additional money you’ve invested.

Calculating Unrealized Gains and Losses

To calculate how much of an unrealized gain or loss you’ve incurred, you’ll want to use the following formula:

Current Value Of Your Investment – Value Of The Original Investment = Unrealized Gain OR Loss

If this amount is positive, it’s considered an unrealized gain. If it’s a negative number, this is considered an unrealized loss. Below, we’ll dive into a few examples of what this might look like in an unrealized gain and unrealized loss situation. 

Unrealized Gain Example

Let’s say you purchased ten Apple shares at $170 per share. Your total investment would be $1,700. The stock has been performing very well, and each share is now worth $200. This means that the current value of your investment would be $2,000. Using the formula above, it would look like:

$200 (current price) – $170 (original investment price) = $30

Since this amount is positive, you would have an unrealized gain of $30 per share.

Pro tip: You can also use Ziggma’s free portfolio tracker to keep track of your current positions. This way, you’ll understand which positions have an unrealized gain and which are currently at a loss.

Unrealized Loss Example

Let’s say that you again purchased ten shares of Apple stock at $170 for a total of $1,700. Unfortunately, the stock price has not performed well and dropped to $150 per share. This means that the current value of your investment would be $1,500. Using the formula above, it would look like:

$150 (current price) – $170 (original investment) = -$20 

Since this amount is negative, you would have an unrealized loss of $20 per share. 

Why Unrealized Gains and Losses Are Important for Taxes

Understanding unrealized gains and losses is important because they can significantly impact when you decide to sell your investment and how long you plan to hold certain investments. By understanding the implications before selling, you can ensure that you make the best plan for your money and your future.

Impact of Capital Gains on Taxes

When you sell your unrealized gains, you’ll earn capital gains on your investment. This means you’ll now have taxable income. You’ll pay short-term capital gains tax if you sell within a year of purchasing the investment. This is the same rate you would pay on your ordinary income. The exact amount will vary depending on how much you earn a year but can range from 10% to 37%. 

However, if you can hold on to this asset for over a year, it will be long-term capital gains. These are taxed at a 0%, 15%, or 20% tax rate. This difference can significantly impact your profits, so you’ll want to consider what makes the most sense for your long-term goals.

Impact of Capital Losses on Taxes

If you sell an unrealized loss, you’ll have a capital loss, which you can use to help offset your tax burden from your capital gains, keeping more money in your pocket. Additionally, if your capital losses are more than your capital gains, you can potentially reduce how much you owe on future capital gains.

Even if you don’t have any capital gains to report, you can still use the loss to help offset how much you owe on your tax return. So, while a loss isn’t always considered a good thing, selling a loss can benefit you in the long term by helping reduce your tax liability.

Do You Need to Report Unrealized Gains on Your Taxes?

The short answer is no. Remember, unrealized gains and losses aren’t real until they’re sold, so you haven’t actually made or lost any money on your investment. However, once you sell it, you must report your realized gains or losses.

The Bottom Line

Unrealized gains and losses might seem tricky, but they’re crucial to understand if you’re currently investing in the stock market or plan to invest in the future. Grasping what they are, how they function, and their tax implications can help you make smarter investment choices. 

Patience is your best friend here. Don’t let the market’s ups and downs sway your emotions too much. Keep your eyes on your long-term investment goals and, if needed, get personalized advice from a financial advisor. 

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