What is an Unrealized Gain?
An unrealized gain is an increase in the value of an asset that has not been sold. It is, in essence, a paper profit. When an asset is sold, it becomes a realized gain. The presence of an unrealized gain may reflect a decision to hold an asset in expectation of further gains, rather than converting it to cash now. The holding decision may also involve an expectation that a longer holding period will result in a lower tax rate, as is the case with the longer holding period required for the capital gains tax.
Investors typically value their current holdings as their original investment, plus unrealized gains, minus unrealized losses.
Example of an Unrealized Gain
For example, ABC Company owns an investment that cost $100,000, but which now has a market value of $120,000. ABC therefore has an unrealized gain of $20,000. Later, ABC needs cash and therefore elects to sell the investment for $120,000. ABC now has a realized gain of $20,000, on which it must now pay taxes.
Accounting for an Unrealized Gain
A common example of an unrealized gain is an increase in the price of shares designated as available-for-sale by the holder of the shares. The accounting for this type of unrealized gain is to debit the asset account Available-for-Sale Securities and credit the Accumulated Other Comprehensive Income account in the general ledger.
Terms Similar to Unrealized Gain
An unrealized gain is also known as a paper gain or paper profit, since the gain or loss has not yet been translated into money.
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