An unrealized gain is a profit made on a stock that has not yet been sold. It is not considered earned until the investor sells the stock and takes the profit. The gain is subject to tax when the investor sells the stock. The term “paper wealth” is used to describe unrealized gains.
An unrealized gain is a gain made on a stock that has not yet been sold. It is also known as paper earnings or paper money. Although the gain exists and the investor who owns the stock could sell at any time, the gain is not realized or claimed until the investor sells the stock and takes the profit from it.
Stocks are partially owned shares in public companies. A stock can be bought and sold on the stock market through online stockbrokers and discount brokers. Stocks go up and down depending on how much each investor is willing to pay for them. The bid, which refers to what people will pay, and the ask, which refers to what people ask, can change from second to second when the stock market is open.
An investor who buys a stock can buy as many shares as he can afford. When each share increases in value, he makes money on that particular part of the share. If he owns multiple shares, he makes a profit on each share he owns. For example, if an investor owns 100 shares of a stock that goes up $0.10 US Dollars (USD), he earns 100 x $0.10 USD or $10 USD.
Any money the investor earns when a stock rises is considered unrealized gain until the investor sells the stock. The gain is known as an unrealized gain because the stock could fall in price and the investor could lose the money he earned. Therefore, until the investor sells the stock and actually takes the profit that he made, he has not really made any money or earned anything on the stock itself.
When an investor sells a stock, the gain is no longer an unrealized gain. At that point, the investor is subject to tax on the gains he makes from the shares given. If he owned the shares for a long period of time, more than a year, he must pay capital gains tax under the United States tax code. If he owned the shares for less than a year, the realized gains are taxed as ordinary income.
Many investors are referred to as having paper wealth, or even paper millionaires, due to the unrealized gain from the shares they own. If the shares don’t sell and the market falls dramatically, these multi-million dollar gains are essentially gone. This occurred when the stock market crashed in 2000, in an event widely considered the “burst” of the tech bubble.
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