What is an Unrealized Loss?
An unrealized loss is a paper loss from holding an asset that has lost value but has not yet been sold.
How Does an Unrealized Loss Work?
Unrealized losses are losses in asset value, but not cash value. For example, an investor may have a stock that has lost 25% of its value with the general decline in the market. If the investor sold the asset, he or she would realize a cash loss. Instead, the investor holds the asset, hoping that it will rise in value. In the meantime, the investor is able to report an unrealized loss on his or her financial statement.
Why Does an Unrealized Loss Matter?
Unrealized losses or gains are particularly important from a tax perspective. For example, capital gains are only taxed when they are realized. For unrealized losses, they are not counted as losses until they are realized.
At the same time, from an investor performance perspective, a loss is a loss, even if it unrealized. The paper loss in a portfolio will affect the amount of collateral or leverage available to the investor.