Definition: An unrealized gain is the increase in value of an investment before it has been sold. An unrealized gain takes place before a transaction has actually occurred. That is why the gain is considered unrealized. It is never actually recorded in the accounting system because the gain hasn’t actually materialized yet.
A good example of an unrealized gain is a piece of appreciated property that a business owns. If Dave’s Restaurant bought a piece of land in 1960 for $10,000 and today it is worth $30,000, Dave would have an unrealized gain on the piece of property for $20,000. Dave wouldn’t record this gain until it is actually incurred.
In other words, Dave can’t record the gain on the land until he actually sells the land. This is consistent with the conservatism principle. We don’t know if and when Dave will sell this piece of land. And since market prices of real estate fluctuate, it would be most conservative not to record the gain until it is actually incurred.
What Does Unrealized Gain Mean?
Another example of unrealized gains is investments that are actively managed and meant to be sold within the next year. These investments are usually called trading securities. As with any stocks and bonds, the prices fluctuate from minute to minute. If a stock is up, it is considered an unrealized gain. Unlike the property in the example above, unrealized gains from trading securities are reported on the income statement. Since these investments are supposed to be sold in the near future, it is fairly conservative to account for them as if they were sold.