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What Are Unrealized Gains? Investment Guide

SmartAsset: What Are Unrealized Gains?

Like most investors, you’ve probably watched your investment account balance fluctuate depending on market conditions, company or fund performance and other factors. Of course, you’d likely prefer to see your account balance grow rather than shrink. It’s exciting to see the value of your investments increase. But unless you sell those assets for cash, any increases are considered unrealized gains. We’ll discuss how unrealized gains work, why they matter for tax purposes and how to calculate them.

Consider working with a financial advisor to analyze possible capital gains on your investments.

What Are Unrealized Gains?

Essentially, unrealized gains are gains “on paper” that have not been sold for profit yet. For example, let’s say you bought seven shares of stock in your favorite company for $10 per share. Then the value of each share jumped to $15, raising the value of your stocks to $105 from $70. However, you’re still hanging onto those shares. You can see that your investment account balance has grown. But that doesn’t translate to more money in your bank account because you haven’t sold your shares yet.

If your investments increase in value, and you continue to hold them, the gains you see in your account are considered unrealized. Unrealized gains aren’t taxable until they become realized gains after you sell an asset. Similarly, if your investments decrease in value and you continue to hold them, your losses are considered unrealized. If you sell an asset at a loss, realized losses can be used to offset any realized gains you might have.

Calculating Unrealized Gains

SmartAsset: What Are Unrealized Gains?

The good news is that calculating unrealized gains is fairly simple. For instance, if your seven shares of stock you purchased for $10 each have since increased to $15, your unrealized gain would be $35 – or seven multiplied by the $5 increase.

Now, let’s say you opt to hold onto your seven shares of stock, and the value of each share eventually climbs to $25. Your unrealized gain would climb to $105, or seven multiplied by the $15 increase. At this point, you’ve held your shares for over a year, so you opt to sell them and transfer the cash to your bank account. Your gains are then realized and subject to long-term capital gains taxes, which vary based on your total annual income.

Common Reasons Investors Hold Instead of Selling

So why hold onto an investment that’s increased in value rather than sell it for a profit? There are a couple of reasons investors might do this. One is to minimize their tax burden. When you sell an investment, it’s subject to capital gains taxes. Short-term capital gains taxes apply if you sell an investment in a year or less, and long-term capital gains taxes apply if you sell an investment after holding it for more than a year.

Generally, the long-term capital gains tax rate is lower than your ordinary income tax rate.  Short-term gains are taxed as ordinary income, at a rate of 10% to 37%, depending on your tax bracket. Long-term gains are taxed at a rate of 0%, 15%, or 20%, depending on your income.

So investors who hold onto assets for a longer time period could benefit from lower taxes on any gains once that asset is sold. Here’s a look at long-term capital gains tax rates for 2023:

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
0%$0 – $44,625$0  – $89,250$0 – $44,625$0 – $59,750
15%$44,626 – $492,300$89,251 – $553,850$44,626 – $276,900$59,751 – $523,050

Investors may also choose to hold onto an asset if they believe it will increase in value over time. So if a share of your favorite company stock has increased in value from $10 to $15, but you predict it’ll climb to over $25 a share in the future, you might choose to hang onto it.

The Bottom Line

SmartAsset: What Are Unrealized Gains?

Unrealized gains are “on paper” investment gains rather than the actual profit from the sale of an asset. While it can be exciting to see unrealized gains in your account, the market will always fluctuate. So it’s tricky to determine when to sell versus hold shares of stock. Your gains will remain unrealized until you sell, but your profit could be larger down the line.

Of course, there are no guarantees the value of your investments will actually increase. It depends on the market, company performance, and other factors. Those seeking investment advice should contact a financial advisor to determine the best course of action.

Tips for Tax Planning

  • Investors with a financial advisor can work together to reduce or avoid capital gains tax on stocks and other investments. By using their experience and knowledge, a financial advisor can propose steps to minimize the taxes you’ll owe on your stock sales. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Capital gains taxes reduce the profits that you’ve earned from your investments. You can properly plan out what your potential liability might be by planning ahead for how your investments might grow. Use our investment calculator to know what your potential increase might be.

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