If you own an asset that increases in value, any increase in value is a paper profit, or unrealized gain. If you sell the asset for more than you paid to buy it, your paper profit becomes an actual profit, or realized gain.
The same relationship applies if the asset has lost value. You have a paper loss until you sell, when it becomes a realized loss.
You owe no capital gains tax on a paper profit, though you use the paper value when calculating gains or losses in your investment portfolio, for example. The risk with a paper profit is that it may disappear before you realize it. On the other hand, you may postpone selling because you expect the value to increase further.
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- Capital Gain, capital gain or loss, Capital gains tax (CGT), Capital loss, Long-term capital gain (or loss), Profit, Profit taking, Realized gain, Unrealized gain, Unrealized loss
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