Explanation :Another example of unrealized gains is investments that are actively managed and meant to be sold within the next year. These investments are usually called trading securities. As with any stocks and bonds, the prices fluctuate from minute to minute. If a stock is up, it is considered an unrealized gain. Unlike the property in the example above, unrealized gains from trading securities are reported on the income statement. Since these investments are supposed to be sold in the near future, it is fairly conservative to account for them as if they were sold.
In a nutshell :
- An unrealized gain is a theoretical profit that exists on paper, resulting from an investment that has not yet been sold for cash.
- Unrealized gains are recorded on the financial statements differently depending on the type of security, whether they are held-for-trading, held-to-maturity, or available-for-sale.
- Gains do not affect taxes until the investment is sold and a realized gain is recognized.
- If an investment is held for longer than a year, the profit is taxed at the capital gains tax rate.
- An unrealized loss is the opposite of an unrealized gain where an investment has decreased in value but has not yet been sold.