what is the difference between realized gains and unrealized gains?
The topic of this article is the answer to the following question: what is the difference between realized gains and unrealized gains?
Let's start by giving a basic definition of what realized gains and unrealized gains are, and then we will go more in depth in discussing the differences between realized gains and unrealized gains and what they mean for you as an investor.
Realized gains and unrealized gains (or loss) are two different classifications of capital gain.Capital gain is the income that you make on assets that you sell for more than the amount for which you purchsed them, assets like stocks, bonds, different kinds of properties, and precious metals.
The first thing that you need to know is that you have to pay income tax on your realized gains, but you do not have to pay income tax on unrealized gains.
So, first of all, let's talk about realized gains.The realized gains is the capital gain that you make on an investment that you receive in the form of cash.So, the investment can actually be when you sell a security, when you receive interest or dividends on a security or cash accounts that is sent to you as cash.If you are looking for where you can find realized gains, there are a few places where you can find them.You can look on the Distribution of Earnings Statement, the Income and Expense Statement, the Withdrawal Earnings Report, and the Balance Sheet.They will not be listed as "Realized Gains."Instead, you will find them reported under the names of Taxable Interest, Miscellaneous Income, Dividends, Capital Gains, and so on.
Second, the basic definition of unrealized gains is that unrealized gains are the capital gain on an investment for which you do not receive cash.Unrealized gains are also defined to as referred to as paper profits.So, the unrealized gain is the amount that your stock's value increases, but you have not sold the stock and you haven't received the cash, so the gain is still unrealized.Or, in other ways, the gain is not yet translated into something physical, like cash.It is still a potential gain, and as soon as you sell the stock, then the gain will become realized when you receive your cash.
The opposite of realized gain is realized loss.Realized loss is any loss that you have when you sell a stock.So if you sell a stock at a lower price than you bought it for, then it is a realized gain.Another way to talk about unrealized gain and unrealized loss is that the unrealized gain/loss is the difference between the current market value of a stock or investment and the book value of that investment.
So why is it important for you to know the difference between realized gains and unrealized gains, and/or losses?Well, you do need to know what you are going to be taxed on when it is time for you to turn in your income tax forms.You will have to pay taxes on your realized gains, but you will pay those taxes at a different rate than the regular income tax.There is a particular capital gains income tax rate.So, keep track of all of your realized gains-even if it is just the $4 per share that you make on your annual dividends.You will have to pay capital gains tax on that dividend.Similarly, when figuring in how much return you will make on a stock when you sell it, don't go and buy that boat before you figure in how much you are going to have to pay in capital gains income tax on that realized gain.