what is an unrealized loss 
an unrealized loss is a paper loss that results from holding an asset that has decreased in price but not yet selling it and realizing the loss an investor may prefer to let a loss go unrealized in the hope that the asset will eventually recover in price thereby at least breaking even or posting a marginal profit for tax purposes a loss needs to be realized before it can be used to offset capital gains unrealized gains and losses can be contrasted with realized gains and losses understanding unrealized lossesan unrealized loss stems from a decline in value on a transaction that has not yet been completed the entity or investor would not incur the loss unless they chose to close the deal or transaction while it is still in this state for instance while the shares in the above example remain unsold the loss has not taken effect it is only after the assets are transferred that that loss becomes substantiated waiting for the investment to recoup those declines could result in the unrealized loss being erased or becoming a profit an unrealized loss can be calculated for a period of time this may span from the date the assets were acquired to their most recent market value an unrealized loss can also be calculated for specific periods to compare when the shares saw declines that brought their value below an earlier valuation the decision to sell an unprofitable asset which turns an unrealized loss into a realized loss may be a choice to prevent continued erosion of the shareholder s overall portfolio such a choice might be made if there is no perceived possibility of the shares recovering the sale of the assets is an attempt to recoup a portion of the initial investment since it may be unlikely that the stock will return to its earlier value if a portfolio is more diversified this may mitigate the impact if the unrealized gains from other assets exceed the accumulated unrealized losses the psychological impact of holding unrealized losses is often different than that of holding gains as investors hope for a rebound in the underlying asset to recoup some or all of their paper losses and may even take on additional risk in hopes of doing so this is known as the disposition effect an extension of the behavioral economics concept of loss aversion the complement of an unrealized loss is an unrealized gain this type of increase occurs when an investor holds onto a winning investment such as a stock that has risen in value since the position was opened similar to an unrealized loss a gain only becomes realized once the position is closed for a profit unrealized losses in accountingwhile unrealized losses are theoretical they may be subject to different types of treatment depending on the type of security securities that are held to maturity have no net effect on a firm s finances and are therefore not recorded in its financial statements the firm may decide to include a footnote mentioning them in the statements trading securities however are recorded in a balance sheet or income statement at their fair value this is primarily because their value can increase or decrease a firm s profits or losses thus unrealized losses can have a direct impact on a firm s earnings per share but their effect on a firm s cash flow is neutral securities that are available for sale are also recorded in a firm s financial statement at fair value as assets calling unrealized losses paper losses implies that the loss is only on paper this is especially important from a tax perspective as in general capital gains are taxed only when they are realized and you can only deduct capital losses on your tax return after they re realized too if you have both capital gains and losses in the same year you can use your capital losses to reduce your tax burden by offsetting your capital gains a capital loss can also be used to reduce the tax burden of future capital gains even if you don t have capital gains you can use a capital loss to offset ordinary income up to the allowed amount example of an unrealized lossassume for example that an investor purchased 1 000 shares of widget co at 10 and it subsequently traded down to a low of 6 the investor would have an unrealized loss of 4 000 at this point if the stock subsequently rallies to 8 at which point the investor sells it the realized loss would be 2 000 for tax purposes the unrealized loss of 4 000 is of little immediate significance since it is merely a paper or theoretical loss what matters is the realized loss of 2 000 