Realised vs unrealised gains, explained

Here is a number that has fooled smarter people than you and me. You open your tracker, your portfolio is up a fat chunk since the morning, and a little voice says: I am richer now. Maybe you are. Maybe you are not. The whole question of realised vs unrealised gains lives in that gap, and getting it wrong is how people congratulate themselves on money that hasn’t arrived, then get a tax bill for money they thought they still had. Let me untangle the two, because once you see the difference you cannot unsee it.

The one distinction that matters with realised vs unrealised gains

Strip away the jargon and there are only two states a gain can be in. An unrealised gain is what your stuff is worth more than you paid, on paper, right now, while you still hold it. A realised gain is what you actually pocketed when you sold. One is a score on a screen. The other is money that genuinely moved.

The unrealised number is a live mark. It is the gap between today’s price and what the position cost you, summed across everything you still own. You could probably sell into it, so it is real enough. But until you do sell, it can vanish on a Tuesday, which makes it imaginary too. The realised number behaves nothing like that. You sold, the gain crystallised at that price, and no amount of market wobble afterwards changes what you banked.

Paper gains are a mood, not a fact

The polite name for an unrealised gain is a paper gain, which is a wonderfully honest phrase if you stop to hear it. It is a gain made of paper. It feels fantastic while a holding climbs. It has wrecked plenty of people when one turns, because a paper gain is really just a mood with a number attached.

Here is the trap. You watch a holding double, you mentally spend it, and you start treating that unrealised gain as part of who you are. Then the position gives it all back and you feel robbed, as if someone took your money, when in truth you never had that money. You had a quote. The investor who knows the difference holds the same position with a steadier hand, because they never confused the live mark with the bank balance. Knowing when a gain is still on paper is also half of knowing when to sell, a discipline we get into in when to sell.

Why the tax office only cares about one of them

Now for the part that turns this from a vocabulary lesson into real money. In most places, and do check the rules where you actually live because tax treatment differs by jurisdiction and this is general education rather than advice for your situation, the tax office does not care one bit about your unrealised gains. Your paper fortune can balloon for years and trigger nothing. The moment you sell and realise the gain, you have a taxable event, and the number is the government’s business too.

This cuts both ways, and the second way is the one people forget. Unrealised losses don’t help you at tax time either. A position that is deep underwater is doing nothing for your bill while you still hold it. Sell, and you realise the loss, which in many systems you can set against realised gains. The point is that “up on paper” and “up in a way the taxman counts” are two different worlds, and the only bridge between them is the act of selling.

The bit everyone gets wrong about which lot you sold

Say you bought the same share three times over two years at three different prices, and now you sell half. Which shares did you just sell? This sounds pedantic and it is in fact the entire ballgame, because the cost of the shares you “sold” decides how big your realised gain is, and therefore your tax.

Many jurisdictions default to first in, first out, which means the oldest shares leave first. So your realised gain is measured against your oldest, usually cheapest, cost basis, which tends to mean a bigger gain on the books. This is where tax lots earn their keep. A tax lot is just a record of one purchase, its date, quantity and price, kept separate so that when you sell, the software knows exactly which lots went out the door and what they cost. Do this in your head and you will get it wrong. Do it in a spreadsheet and you will get it wrong more slowly. If the FIFO machinery is new to you, we pulled it apart in FIFO vs average cost.

How a reconciled book keeps the two honest

All of this comes down to one job. Keep the imaginary number and the real number in separate boxes, clearly labelled, so you never mistake one for the other. A proper book does exactly that. A sloppy one quietly fails at it.

In Strata you keep the ledger. You type in what you bought, what it cost and when, across every account you hold, and from that single pile of facts the software derives both numbers and refuses to mix them up. Your unrealised P&L is computed live, the current mark against your cost basis on everything you still hold, and labelled as exactly what it is, a paper number that holds true until the market changes its mind. Your realised P&L only moves when you log a sell. At that moment Strata walks your tax lots in FIFO order, works out which ones left and what they cost, locks in the realised gain or loss, and parks it on the realised side of the book where the market can no longer touch it.

Two numbers in two clearly marked boxes, with one source of truth feeding both. You can hold the unrealised figure up against your statements and know it is right. Look at the realised figure and you know it is the one that matters come tax time. No credentials change hands and nothing logs in as you, because it is all derived from a record you typed and can actually read. That is the quiet luxury of a book you reconcile yourself rather than one a robot scrapes on your behalf.

So which number should you actually look at?

Both, but for different jobs, and never one pretending to be the other. The unrealised gain tells you how your live bets are doing and whether the reasons you bought still hold. The realised gain tells you what you have actually achieved and what you owe on it. Trouble starts the instant you let the paper number do the realised number’s job, spending a gain you have not banked, or feeling poor over a loss you have not taken.

Keep them apart and a lot of investing stress simply evaporates. The market can do what it likes to your paper number, and you can watch it with the calm of someone who knows it is just weather until the day they choose to make it real. If you would rather your tracker did this for you, plainly and without ever asking for a single password, you can build your portfolio.