Where Do You Record Unrealized Gains and Losses?

Investments that have increased in value and are sold for profit generate realized gains, which are subject to capital gains taxes. Unrealized gains, on the other hand, are theoretical paper gains that won’t be taxed unless you sell the investment for a profit.

Realized and unrealized gains are recorded differently on financial statements and tax forms – and they won’t affect your taxes until the investment is sold, whereupon those unrealized gains become realized gains and must be reported to the Internal Revenue Service.

Unrealized losses, meanwhile, are when an investment has declined in value but hasn’t been divested. An example is a company’s stock whose share price is currently below what you paid for it, or an investment property that’s worth less today than when you purchased it.

Below we’ll take a look at where you record unrealized gains and losses on financial statements.

Reporting Unrealized Capital Gains and Losses

Unrealized gains or losses have no bearing on a taxpayer’s annual return filed with the IRS – they only need to be dealt with when an investment is sold and a gain or loss is realized. When you do have realized capital gains or losses, you’ll use Schedule D of your Form 1040 to report any profit or loss from the sale of a capital asset.

You’ll have to file the same year in which you disposed of the asset, which can have important tax consequences. Long-term capital gains are taxed at a different rate than short-term gains, which are taxed as ordinary income at your nominal tax rate.

The dot-com bubble of the late 1990s is an excellent example of unrealized gains and losses. Countless employees received stock options in companies that made them paper millionaires, although they had to hold their options rather than cash out. When the bubble burst and share prices plummeted, all those unrealized gains simply vanished.

Although you don’t have to report unrealized gains or losses, many investors and corporations record them on their balance sheets so they can denote potential shifts in value of assets that haven’t yet been sold or settled.

The Bottom Line

Unrealized losses and gains have no immediate tax consequences because they are just paper profits or paper losses. Investors only have to report gains or losses when they divest capital assets, and then they must reconcile the profit or loss on Schedule D of their Form 1040 in the same tax year they sold the asset. This reporting requirement is important since there are very different tax consequences for short-term or long-term capital gains.