On any given day, it’s normal to see the investments in your portfolio go up or down in value depending on what’s going on in the markets.
These fluctuations—gains or losses on paper—aren’t permanent. A “loss” this week could become a “gain” next week (or vice versa). And that’s because gains and losses are considered “unrealized” until you actually sell the investment. In other words, you only “realize” your gains and losses when the investment is sold.
Understanding the distinction between unrealized and realized gains/losses is important because there are tax implications that could impact your tax bill at the end of the year.
You may already be familiar with the concept of gains and losses.
As we’ve mentioned, the gains and losses you see in your portfolio are considered “unrealized” until you sell the investment. That’s why unrealized gains/losses are sometimes called “paper” profits or losses. Because until you actually sell the investment, your gains or losses are simply numbers on a piece of paper.
In other words, unrealized gains/losses aren’t “locked in.” This means that if you’re holding onto assets with unrealized losses, it’s possible for them to become unrealized gains when the market is having a good week.
Let’s look at a basic example. Say you purchased a share of Stock XYZ for $50 last month. This month, you noticed that the stock price has dropped to $40 a share. You hold onto the stock because you know market fluctuations are normal. You now have an unrealized loss of $10 on Stock XYZ because the value of the stock is $10 less than the original purchase price of $50.
Fast forward to six months down the road—Stock XYZ is now valued at $70 per share. You’re still holding onto the stock, which means you have an unrealized gain of $20 per share (or $20 more than your original purchase price of $50).
If you sell an investment and make a profit, that’s a realized gain. On the other hand, if you sell it at a loss (that is, for less than the original purchase price), you have a realized loss.
Realized gains/losses matter because they could impact your tax bill at the end of the year.
Keep in mind that investment taxes can be complicated, and as everyone's tax situation is different, it's always a good idea to consult your financial or tax advisor if you have any specific questions or concerns.
Realized gains are typically subject to the capital gains tax. Capital gain is simply another term for the profits that you make when you sell an asset such as a stock, bond, or exchange-traded fund (ETF).
Generally speaking, the tax you pay on your realized capital gains depends on how long you’ve held onto your investments (short-term vs. long-term).
Because you may sell multiple assets in a given year, calculating your potential capital gains tax can be challenging. Consider working with a tax professional to help ensure accuracy.
You typically need to figure out details like: How long you held onto the assets; cost basis (i.e.: generally, how much you originally paid for the assets); and net capital gain/loss.
In a tough investment year, you might experience a “capital loss,” where you lose money from your investment sales. Per the IRS, generally, you can deduct up to $3,000 net capital losses a year on your tax return ($1,500 if married filing separately).
Important: If you’re planning on deducting tax losses, consult a tax professional for more information on any IRS rules that may apply to you (see IRS Publication 550).
You might be wondering how you could keep track of all your realized gains and losses in a given year.
Thankfully, your financial institution, as well as your financial advisor, may be able to lend a hand. If you have an investment account, your financial firm will typically send you information about your holdings each year, which you can use to help file your tax return.
This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format without the express written consent of Goldman Sachs. This foregoing restriction includes, without limitation, using, extracting, downloading or retrieving this information, in whole or in part, to train or finetune a machine learning or artificial intelligence system.
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