When you sell an investment for more than you paid, you have a realized gain.
For example, if you buy a stock for $20 a share and sell it for $35 a share, you have a realized gain of $15 a share. In contrast, if the price of the stock increases, and you don't sell, your gain is unrealized, or a paper profit.
Realizing your gains means you lock in any increase in value, which could potentially disappear if you continued to hold the investment.
But it also means you may owe tax on that profit when you sell unless the investment is tax exempt or you hold it in a tax-deferred or tax-free account. In a tax-deferred account, you can postpone paying the tax until you begin withdrawing from the account.
However, if taxes are due and you have owned the investment for more than a year when you sell, you pay tax at the long-term capital gains rate, which, for most types of investments, is lower than the rate at which you pay federal income tax on ordinary income.
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- Capital Gain, capital gain or loss, Capital gains tax (CGT), Capital loss, Long-term capital gain (or loss), Paper profit (or loss), Profit, Profit taking, Unrealized gain, Unrealized loss
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