Lesson 6 of 25 · 6 min

Why an unrealised gain and a realised gain are different objects

One is a price that can still fall to nothing; the other is a number the market cannot take back.

An unrealised gain and a realised gain are not two states of the same thing. They are different kinds of object, and only one of them is a number.

An unrealised gain is a subtraction between two prices, one of which is today's. It moves every second the market is open, it can halve, and it can go to nothing without anyone doing anything at all. It has no date. It enters no period. It is a description of a holding.

A realised gain is an event. It has a date, it has a figure, and once the figure exists it stops moving with the market. If the security falls by half the following week, the realised gain is what it was. That asymmetry is the whole reason the distinction matters: the price that produced the number can vanish, and the number cannot.

Numbers. A holding with a $268,000 basis reaches $1,020,000, so $752,000 of unrealised gain exists on that day. It is sold instead at $870,000, realising $602,000. Assume 22 percent purely to make the arithmetic followable and the resulting figure is $132,440. Six months later the same security is worth $540,000. The $752,000 was never anything. The $602,000 is fixed, and so is the $132,440.

This is also the cleanest way to see what borrowing does and does not do. Drawing against a holding leaves the gain in its unrealised form, where it is still a price and can still disappear. What follows from that in any particular system is a matter for an adviser rather than for a lesson, because the rules that convert one object into the other differ.

Key terms

Unrealised gain: The difference between an asset's current price and its basis. It belongs to no period and can be undone by the market.
Realised gain: A figure fixed by a disposal, carrying a date. Later price movements in the same security do not change it.

Worked example

A price that vanished and a number that did not

A holding with a basis of $268,000. It reaches $1,020,000, is sold at $870,000, and the same security is worth $540,000 six months later.

Unrealised gain at the peak: $752,000
Realised gain on the sale: $602,000
At an assumed 22 percent: $132,440
Value of the same security six months later: $540,000
Change in the realised figure: $0

The market destroyed one of these two quantities and could not touch the other. Only the second was ever a number.

Check yourself

A holding with a $268,000 basis peaks at $1,020,000, is sold at $870,000, and the security then falls to $540,000. Which of the gains along that path still exists, and at what size?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.