Realized vs. Unrealized “Paper” Profits: What Investors Need to Know
KEY TAKEAWAYS Unrealized or "paper" profits change with market value but are not taxed until realized by sale. Realized profits are gains converted into cash and often subject to capital gains tax. Holding assets without selling can defer taxable income; realized losses can offset capital gains. Unrealized gains or losses show potential changes only "on paper" until assets are sold. Behavioral finance shows loss aversion influences reluctance to sell losing investments. It's important for investors to differentiate between realized profits and unrealized or "paper" profits when buying and selling assets. Realized profits refer to financial gains that occur when you sell an investment for more money than you paid for it. Any change of value experienced is unrealized or "on paper" until an investment is disposed of. Only when the investment is sold is a loss or gain realized and only then would you be subject to taxation. 1 Understanding the di...