What Is Unrealised Profit: Whenever you buy a stock at market price, you can almost instantly see that its price would have changed from your buying price.

This price movement is what benefits investors and traders over the long term, as it moves the stock price up or down, making the difference between profit and loss.

Based on how your holdings have moved, it could either show positive or negative change. In this article, we’re going to answer a relevant question regarding unrealised gains & losses – “What Is Unrealised Profit?”

What Is Unrealised Profit?

Also known as “unrealised gains”, unrealised profit is the positive gains or price appreciation of an asset, when compared to its buying price.

The reason it remains unrealised is that the holder/investor of the asset decides to hold onto his stocks/assets instead of selling them. This means your gains are true on paper but haven’t been realized for cash. 

Understanding How Unrealised Profits Work

Gains are made from the stock market when the buying price of the stock is lower than the current price of the stock in your portfolio. This includes all your broker fees when you invested in the stock as well. 

When it comes to taxes on capital gains, understand that taxes are charged only when you sell the assets for a profit, and it depends on how long you held the asset.

Due to the difference in tax rates between long-term and short-term capital gains, most investors hold onto their stocks for a longer period of time, effectively increasing their net worth, while also saving on paying taxes until they finally decide to sell their shares.

In India, short-term capital gains are charged at a different tax rate than long-term capital gains. 

Example Of Unrealised Profits

Let’s understand unrealised profits using an example. Let’s say an investor bought 100 shares of Tata Motors at ₹400 a piece. After 3 months, the stock moves to ₹450 per share, giving the investor a profit of ₹50 per share, excluding other fees.

But, this profit is only real on paper. If they decide to hold onto the shares, their profits of ₹5,000 rupees remain unrealised. (₹50 profit per share * 100 shares = ₹5,000)

What Is Unrealised Loss?

Now that you have a general idea about unrealised profits, let’s take a look at unrealised losses. It is the opposite of unrealised profits, where instead of profits, you are holding on to a loss-making investment, instead of selling it and realizing them. 

Example Of Unrealised Loss

In the example for unrealised profit, we explained how an investor’s gains are unrealised when he makes a profit on his holdings, but only on paper.

Now alternatively, if the investor bought the 100 shares of Tata Motors at ₹400 per share, and its market price fell to ₹350 per share, they would have an unrealised loss of ₹5000 per share. (₹50 loss per share * 100 shares = – ₹5,000). 

Taxes On Unrealised Profits/Unrealised Losses

Both unrealised profits and unrealised profits are also known as paper gains and paper losses respectively. This is because the price changes are not realized by the holders/investors until they sell their shares, and so only exist on paper.

Only realized gains/profits are taxed in the stock market, irrespective of how much gains or losses you incurred. 

According to the Income Tax Act,1961 profits made from selling stocks and other securities are called capital gains. The taxes to be paid on these gains are only after selling them. 

Unrealised losses made through the selling of stocks and other securities can be offset with capital gains of that year or carried forward to the next year.

Also Read – Differences between Long-Term Capital Gains & Short-Term Capital Gains

In Closing

We hope you understood “what is unrealised profit?” through this article. Remember that capital gains taxes only come into the picture when you sell the stocks and until then, your profits are still unrealised and only exist on paper. This allows many investors to reduce their tax burden over time.

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