Unrealized Gains

Anyone who buys a share for 100 euros and later sees that it is worth 150 euros has 50 euros more than before. But only on paper. As long as the share isn’t sold, this increase exists merely as a number on the portfolio statement. That is exactly what is called an unrealized gain. Only upon sale does money actually flow into the account, and the paper value becomes a real profit. This is then referred to as the gain having been realized.

Why paper values are deceptive

An unrealized gain is not a secure balance, but a snapshot in time. It depends entirely on what price other people would pay for the investment today. If the price falls tomorrow, the gain falls with it. It can even turn into a loss without the investor having done anything themselves.

Many investors underestimate this. They see a plus of 40 percent in their portfolio and mentally treat it like cash. During the market crashes of 2000, 2008, and 2022, such gains disappeared within a few months. Those who hadn’t sold ended up with nothing from it. That is the most important difference between a book gain and a realized gain.

Nevertheless, unrealized gains are not worthless. Banks accept valuable portfolios as collateral for loans. And those who invest for the long term rarely sell anyway, instead letting the value grow over decades. So the number is indeed meaningful, just not guaranteed.

How the value in a portfolio comes about

The calculation is simple. You take the current market price of the investment and subtract the price paid at purchase. The difference multiplied by the number of units gives the unrealized gain. For ten shares, bought at 100 euros, currently at 150 euros, that comes to 500 euros.

The crucial question is which market price actually applies. For a stock this is straightforward, since it is traded continuously on the exchange. For real estate or a stake in a young company, there is no constant price. There, the value must be estimated, and such estimates are often off. Companies call this valuation at current market prices mark-to-market.

An important point is taxation. In Germany, one generally does not pay capital gains tax (Abgeltungsteuer) on unrealized gains. It only becomes due upon sale, that is, upon realization. That’s why some investors think carefully about which year to sell in. Different rules apply to companies: they must show certain changes in value in their balance sheet beforehand.

What becomes visible of this in quarterly figures and crypto apps

In every portfolio app and every broker interface, the green or red number stands next to the position. That is the unrealized gain or loss. Crypto exchanges also display it prominently, often in large lettering. This presentation tempts people to experience every price movement as if it were an actual flow of money.

The term regularly appears in business news around quarterly earnings. Technology companies hold stakes in other firms, and fluctuations in their value run through the balance sheet. For instance, Tesla reported large gains or losses in individual quarters solely from the revaluation of its Bitcoin holdings. This had nothing to do with the actual car business.

The topic also plays a role in the debate about wealth and taxes. When headlines report that a company founder lost several billion in a single day, they almost always mean unrealized amounts. His stock holdings are worth less, but he hasn’t sold anything. Whether such book gains should be taxed has been debated internationally for years.