Unrealized Gains

Suppose you bought shares in a company for 1,000 euros. A year later, those shares are worth 1,400 euros. The 400-euro increase is called an unrealized gain. It’s called that because you haven’t cashed it in yet: you still own the shares, and no money has actually changed hands. Only once you sell does the calculated plus turn into real money in your account. Until then, the gain is just a number that can change every single day.

Why wealth on paper can be deceptive

When the news reports that someone lost billions overnight, it’s almost always about unrealized gains. The wealth of company founders usually consists of shares in their own company. If the share price drops by ten percent, that wealth shrinks accordingly. Nothing was actually sold, and this money could never have been spent anyway.

For investors, this is an important distinction. A portfolio that’s up 30 percent feels like a success. But as long as nothing has been sold, that success can be reversed at any moment. Many people still make decisions as if the money were already in hand, spending more or taking on greater risks.

The same holds true in reverse for losses. An unrealized loss hurts, but it isn’t yet a final fact. Anyone who sells in a panic turns a calculated minus into a real one. This is exactly why many experts advise staying calm during short-term price drops.

How book value turns into real money

The math behind it is simple. You take the current market value of an asset and subtract the purchase price. What remains is the unrealized gain. The market value is the price others are currently willing to pay. It’s constantly being reformed on the market and can fluctuate by the second.

As soon as you sell, it’s called a realized gain. At that moment, the price is locked in, the money changes hands, and the gain is secured. At the same time, in Germany it becomes taxable: realized capital gains are subject to the flat-rate withholding tax (Abgeltungsteuer), currently 25 percent plus surcharges. On unrealized gains, you generally pay nothing. This is one reason why some investors deliberately avoid selling for a long time.

For companies, things work a bit differently. They must regularly revalue certain assets on their balance sheet. If the value rises, the unrealized gain shows up in the figures even though no money has actually changed hands. This is why a company can report high profits on paper while still being short on cash.

Where you’ll run into paper gains

You’ll most often encounter them in stock trading apps and online brokerage accounts. Next to every position, there’s a green or red number. Almost always, that’s an unrealized gain or loss. Some apps even show how much would be left after taxes if you sold right now.

This principle also applies outside the stock market. Anyone who owns an apartment that has increased in value since purchase is sitting on an unrealized gain. The same goes for cryptocurrencies, gold, or collectibles. The value only exists as long as a buyer can be found who’s willing to pay it.

In the tech industry, this issue plays a special role. Start-up employees are often given shares instead of a high salary. On paper, this sometimes makes them millionaires. But they often can’t sell those shares until years later, or not until an IPO happens. If the company goes bankrupt before then, the gain was never more than a number in a spreadsheet.