If you’re an investor who trades quite often, you might have encountered a section labeled ‘unrealized gains and losses’ on your trading account. This section usually displays certain values that may either be positive or negative, depending on the circumstances. You might have also noticed these values changing every single day after the closure of the trading session. Have you ever wondered what the values in the ‘unrealized gains and losses’ section of your trading account represent or signify? If you have, then here’s your answer. 

What are unrealized gains and losses?

An increase in the value of an investment, such as a stock or a security that you hold but haven’t yet sold off, is generally termed as an unrealised gain. Similarly, a decrease in the value of an investment, such as a stock or a security that you hold but haven’t yet sold off, is usually termed as an unrealised loss. 

For instance, after you’ve purchased a stock from the stock market, the value of the investment would almost always experience a change. Till the time you hold the said stock in your portfolio, any increases in its value shall be termed as unrealised gains and any decreases in its value shall be termed as unrealised losses. 

Since unrealized gains are potential profits sitting in your account, the values are always positive and are usually represented in green. Similarly, since unrealized losses are potential losses, the values are always negative and are generally represented in red.     

Examples of unrealized gains and losses

Now that you’ve found the answer to the question ‘what are unrealized gains and losses?’, let’s take a look at a couple of examples to better understand the concept.    

An example of unrealized gains

Assume that you buy a share of HDFC Bank Limited for around Rs. 1,100. Two days later, suppose that the share price closes at around Rs. 1,150. Since you still continue to hold the share in your account, the unrealized gain in your trading account would show up as Rs. 50 (Rs. 1,150 – Rs. 1,100) as on the end of the second day. And on the third day, say the share price rises even further up and closes at around Rs. 1,200. Now, the unrealized gain in your trading account would also reflect this increase and would show up as Rs. 100 (Rs. 1,200 – Rs. 1,100).   

An example of unrealized losses

Let’s now assume that you buy a share of Yes Bank Limited for around Rs. 30. Two days later, suppose that the share price closes at around Rs. 25. Since you still continue to hold the share in your account, the unrealized loss in your trading account would show up as Rs. 5 (Rs. 25 – Rs. 30) as on the end of the second day. And on the third day, say the share price falls even further and closes at around Rs. 20. Now, the unrealized loss in your trading account would also reflect this subsequent decrease and would show up as Rs. 10 (Rs. 20 – Rs. 30).   

Tax implications of unrealized gains and losses  

According to the provisions of the Income Tax Act, 1961, any profits that you make through the sale of stocks and other securities are termed to be capital gains and are liable to be taxed accordingly. 

On a similar note, any losses that you make through the sale of stocks and other securities are termed as capital losses and can either be set-off with that year’s capital gains or be carried forward to the next year. 

That said, irrespective of how large the unrealized gains and losses are, there are absolutely no tax implications whatsoever. This is primarily because of the fact that unrealized gains and losses are merely potential profits and losses. Also, in order for a profit or a loss to be considered as a capital gain or a capital loss, there has to be a sale and subsequent transfer of the said asset.     

Conclusion

And so, the concept of capital gains or capital losses and their subsequent taxation comes into play only when you realize the gains or losses by actually selling and transferring the concerned asset. Therefore, many investors prefer to keep their profits unrealized and adopt a staggered selling approach to lessen their capital tax burden.