2023 Tax Season: What Is Unrealized Gain or Loss and Is It Taxed?
When you invest — whether in stocks, real estate or cryptocurrencies — the fair market value of your investment could change hundreds or thousands of times before you sell it. Until you sell, your investment gains or losses are just on paper because you haven’t actually locked them in by cashing out. At this point, any change in value since you purchased the investment is known as an unrealized gain or unrealized loss.
What Are Unrealized Gains and Losses?
An unrealized gain refers to the potential profit you could make from selling your investment. In other words, if an asset is projected to make money but you don’t cash in on that profit, it’s an unrealized gain.
An unrealized loss refers to the drop in an asset’s value before it’s sold. If you sell that asset, it becomes a realized loss.
How To Calculate Unrealized Gains and Losses?
According to SoFi, in order to calculate unrealized gains and losses, subtract the value of your asset at the time you purchased it from its current market value. If the amount is positive, your asset has increased in value. If the amount is negative, it means that your asset has decreased in value.
If you purchased more than one unit of the asset, find your total unrealized gain or loss by multiplying the gain or loss by the number of units you purchased. For example, if the share price of stock you purchased a year ago has increased by $100 and you have 1,000 shares, your total unrealized gain is $100,000.
Examples of Unrealized Gains and Losses
Unrealized gains and losses occur any time a capital asset you own changes value from your basis, which is usually the amount you paid for the asset. For example, if you buy a house for $200,000 and the value goes up to $210,000, your basis is $200,000 and you have a $10,000 unrealized gain. If the value drops to $190,000, you have a $10,000 unrealized loss.
Tax Implications of Unrealized Gains and Losses
There is no unrealized gain tax, so you won’t report unrealized gains — or losses — on your tax filings. For example, if you were ahead of the curve and bought bitcoin for $100 and now it’s worth $25,100, you have an unrealized gain of $25,000. But because you haven’t cashed in and sold the bitcoin, you don’t have to report the gain and you don’t need to bring the records in when you go to your accountant for tax preparation.
Similarly, if you were late to the party and bought bitcoin for $50,100 and it’s now worth $25,100, you can’t claim a $25,000 loss on your taxes. The price could change before you sell, so you must actually sell the investment before you can claim the loss on your tax return.
Permanent Avoidance of Taxes on Unrealized Gains and Losses
The only way to avoid paying taxes on the unrealized gains is to hold on to the investment indefinitely — unless you die, in which case the basis for the assets in your estate is stepped up or down to the fair market value at the time of your death. This means your heirs will never pay taxes on the unrealized gains.
For example, say you bought a stock for $200 and it grew to $300, giving you a $100 unrealized gain. If you sold it, you would realize the gain of $100 and pay taxes on it. But if you die and your heirs sell it the next day for $300, they don’t pay any taxes on the gains because their basis — the value when they inherited it — is $300.
This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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Daria Uhlig and Taylor Bell contributed to the reporting for this article.
