When holding a long or short position, the stock’s price can go two ways: up or down. Up would signal profit and down… well, you already know. However, these gains or losses are classified into two categories, realized and unrealized.
Before we jump straight in, let’s review gains and losses. A gain is calculated by finding the difference between the current market price and the initial investment amount. If the market price is higher than the price you bought at, then congratulations, you made a profit. If not, we have a loss on our hands.
A Realized gain is the money that you receive when you sell your stock for cash. The cash you receive after the sale is your realized gain or loss because you no longer have the stock, you have real cash. Realized gains are taxable and are often called capital gains. We will dive into this a little deeper in the next two bites.
Now, an unrealized gain is just the opposite. You have the stock, not the cash. These gains are often called “paper profits” because your investments are profitable on paper, but not secured or realized. Since they are not realized, they can not be taxed!
Determining when to realize your profits is often a hard choice. Before selling, always consider the role taxes play.
I realize this one was pretty basic so, let’s take a closer look into capital gains!