ExpertGlossary

Sun Microsystems - Cite This Source - This Definition

If you own an investment that has increased in value, your gain is unrealized until you sell and take your profit.

In most cases, the value continues to change as long as you own the investment, either increasing your unrealized gain or creating an unrealized loss.

You owe no income or capital gains tax on unrealized gains, sometimes known as paper profits, though you typically compute the value of your investment portfolio based on current - and unrealized - values.

If the market price of a security you own drops below the amount you paid for it, you have an unrealized loss.

The loss remains unrealized as long as you don't sell the security while the price is down. In a volatile market, of course, an unrealized loss can become an unrealized gain, and vice versa, at any time.

One reason you might choose to sell at a loss, other than needing cash at that moment, is to prevent further losses in a security that seems headed for a still-lower price.

You might also sell to create a capital loss, which you could use to offset capital gains.