# Realized vs. Unrealized Gains: Understanding and Differentiating

![Realized Gain: A profit resulting from selling an asset for more than the original purchase price. ](https://www.investopedia.com/thmb/ZzS-C4GdEldfochhpfPiXDlPgAE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Realized-Gain-final-69ad964d49a848fa8d8789697c738ef3.png)

*An unrealized gain is when an asset is carried on a balance sheet on a level above cost. — Investopedia*

## What Is a Realized Gain?

Realized gains occur when you sell an asset for more than its purchase price, formalizing profit and creating a taxable event. While on paper, an asset's increase in value is an unrealized gain, only a sale turns it into a realized gain. This distinction impacts how gains are accounted for and taxed, affecting your overall financial strategy. It occurs when an asset is sold at a level that exceeds its [book value](https://www.investopedia.com/terms/b/bookvalue.asp) cost.

While an asset may be carried on a [balance sheet](https://www.investopedia.com/articles/04/031004.asp) at a level far above cost, any gains while the asset is still being held are considered unrealized as the asset is only being valued at [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp). If selling an asset results in a loss, there is a [realized loss](https://www.investopedia.com/terms/r/realizedloss.asp) instead.

A realized gain can be compared with an [unrealized gain](https://www.investopedia.com/terms/u/unrealizedgain.asp).

### Key Takeaways

*   Realized gains occur when an asset is sold for more than its initial purchase price, resulting in a profit.  
    
*   Unrealized gains are potential profits on paper from assets not yet sold, often valued at fair market value.  
    
*   Realized gains lead to taxable events, whereas unrealized gains do not generate immediate tax liabilities.  
    
*   Holding an asset for over a year may qualify the gain for a lower long-term capital gains tax rate.  
    
*   Asset sales at fair market value ensure accurate market representation and can increase a company's current assets.

## Understanding the Mechanism of Realized Gains

Realized gains and unrealized gains vary considerably. Realized gains are those that have been [actualized by selling](https://www.investopedia.com/ask/answers/06/realizedprofitsvsunrealizedprofits.asp) an existing position for more than what was paid for it. An unrealized ("paper") gain, on the other hand, is one that has not been realized yet.

> **Important**
>
> Realized gains result in a taxable event, but unrealized gains are typically not taxed. They add to an asset’s originally reported book value at the time of purchase and can occur on all types of assets and investments held by a company.

## Impact of Realized Gains on the Balance Sheet

Realized gains may occur through the sale of an [asset](https://www.investopedia.com/terms/a/asset.asp) when a company chooses to eliminate it from the balance sheet. Asset sales can occur for various reasons and purposes and are reported on the [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp) of a company during the period in which the asset sale takes place.

Asset sales are monitored to ensure they are sold at fair market value or an [arm’s length](https://www.investopedia.com/terms/a/armslength.asp) price. This rule ensures companies price the sale correctly and checks if the asset is sold to related or unrelated parties.

Selling an asset results in a realized profit, increasing the firm's [current assets](https://www.investopedia.com/terms/c/currentassets.asp) and sales gains. Realized gains usually increase the tax burden because they are [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp). This is one drawback of selling an asset and turning an unrealized "paper" gain into a realized gain.

In most business cases, companies do not incur any tax until a realized and tangible profit occurs.

## Comparing Realized and Unrealized Gains

While realized gains are actualized, an unrealized gain is a potential profit that exists on paper, resulting from an investment. It is a rise in an asset's value that hasn't been sold for cash, like an appreciated stock. A gain is realized once the asset is sold for a profit.

When unrealized gains are present, it usually means an investor believes the investment has room for higher future gains. Otherwise, they would sell now and recognize the current gain. Additionally, unrealized gains sometimes come about because holding an investment for an extended time period lowers the tax burden of the gain.

For example, if an investor holds a stock for longer than one year, their tax rate is reduced to the long-term [capital gains tax](https://www.investopedia.com/terms/c/capital_gains_tax.asp). Further, if an investor wants to move the capital gains tax burden to another [tax year](https://www.investopedia.com/terms/t/taxyear.asp), they can sell the stock in January of a preceding year, rather than selling in the current year.

Investors should also note the distinction between realized gains and realized income. Realized income refers to [income](https://www.investopedia.com/terms/i/income.asp) that you have earned and received, such as income from wages or a salary, as well as income from interest or [dividend](https://www.investopedia.com/terms/d/dividend.asp) payments.

## The Bottom Line

Understanding the distinction between realized and unrealized gains is crucial for investors and businesses alike. Realized gains occur when an asset is sold for more than its original purchase price, triggering potential tax liabilities. In contrast, unrealized gains represent paper profits on holdings that have increased in value but have not been sold. Recognizing these differences can aid in managing taxes and making informed financial decisions. Whether optimizing tax burdens or deciding the right time to sell, grasping the implications of these gains is essential for effective financial planning.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Topic No. 409 Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409)."