Like the majority of investors, you have probably observed how your investment account balance changes in response to market conditions, the performance of a company or fund, and other factors. Naturally, you’d probably rather see your account balance increase than decrease. Seeing your investments rise in value is exciting. Any increases, on the other hand, are regarded as unrealized gains unless you sell those assets for cash. We’ll talk about how unrealized gains work, why they are important for taxes, and how to figure them out.
What Are Unrealized Gains?
Unrealized gains are essentially gains that have not yet been sold for profit “on paper.” Let’s say you paid $10 each for seven shares of stock in your favorite business. The value of your stocks increased from $70 to $105 when the value of each share increased to $15. However, those shares are still in your possession. The amount in your investment account has increased, as you can see. However, since you have not yet sold your shares, that does not translate into additional funds in your bank account.
The gains you see in your account are considered unrealized if you keep holding on to investments that appreciate in value. After you sell an asset, gains that weren’t realized aren’t taxable until they are. In a similar vein, your losses are regarded as unrealized if you continue to hold investments despite their declining value. Realized losses can be used to offset any potential realized gains if you sell an asset at a loss.
Calculating Unrealized Gains
The good news is that unrealized gains can be easily calculated. For instance, if the price of the seven shares of stock you bought for $10 each now stands at $15, your unrealized gain would be $35, or seven times the $5 increase.
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Now, let’s say you decide to keep your seven shares of stock, which eventually rise in value to $25 each. Your unrealized gain would rise to $105, which is seven times the increase of $15. You decide to sell your shares and transfer the proceeds to your bank account because you have held onto them for more than a year. After that, your gains are realized and you are liable for long-term capital gains taxes, which depend on how much money you make in a year.
Common Reasons Investors Hold Instead of Selling
Therefore, rather than selling an investment for profit, why hold on to one that has increased in value? This could be done by investors for a number of different reasons. One option is to lessen their tax burden. Capital gains taxes apply when you sell an investment. If you sell an investment within a year or less, you are subject to short-term capital gains taxes; if you sell an investment after holding it for more than a year, you are subject to long-term capital gains taxes.
In most cases, your ordinary income tax rate is higher than the long-term capital gains tax rate. Depending on your tax bracket, short-term gains are taxed at a rate ranging from 10% to 37% as ordinary income. Depending on your income, long-term gains are taxed at zero, fifteen percent, or twenty percent.
Therefore, when an asset is sold, investors who keep it for a longer period of time may be able to take advantage of lower taxes on any gains. The following is a look at the 2023 long-term capital gains tax rates:
|Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|0%||$0 – $44,625||$0 – $89,250||$0 – $44,625||$0 – $59,750|
|15%||$44,626 – $492,300||$89,251 – $553,850||$44,626 – $276,900||$59,751 – $523,050|
If an asset’s value is expected to rise over time, investors may also decide to hold onto it. Therefore, you might decide to hold onto a share of your favorite company stock that has increased in value from $10 to $15 but you anticipate will rise to over $25 per share in the future.
The Bottom Line
Unrealized gains are not the actual profit from the sale of an asset but rather gains from investments that are “on paper.” Unrealized gains in your account can be exciting, but the market will always fluctuate. As a result, deciding when to sell and when to hold stock is difficult. Until you sell, your gains will not be realized, but your profit may grow over time.
Naturally, there are no assurances that your investments will actually appreciate in value. It depends on the market, how well the company is doing, and other things. A financial advisor should be contacted by people seeking investment advice to determine the best course of action.
Tips for Tax Planning
- Investing in stocks and other investments can be reduced or avoided by working together with a financial advisor. A financial advisor can help you reduce the amount of taxes you will have to pay on your stock sales by utilizing their expertise and knowledge.
- Your investments’ profits are reduced by capital gains taxes. By anticipating how your investments will develop, you can accurately calculate your potential liability.