Realized profit/loss definition
Realized profit/loss
A realised profit or loss occurs when an investment is sold for a higher or lower price than purchased for, and it is only recognised once the transaction has been made. A realised profit is also known as a realised gain and only becomes liable for capital gains tax at this point.
For example, if an investor buys 1000 shares at $5 each and sells when the shares reach a market value of $8, they will have a realised profit of $3,000 ($8,000 -$5,000). Conversely, if the shares dropped to $2 each and sold, they would have a realised loss of $3,000 ($2,000 - $5,000).
Unrealised profit/loss
An unrealised profit or loss represents the current value minus the original investment price. They are also known as "paper profits or losses" because they remain theoretical until sold.
Investors use unrealised profits to calculate the value of their portfolios. Securities that are 'held to maturity’ are not directly included in the financial statements, but those 'held for trading' are recorded on the balance sheet with a fair value assigned.