Unrealized Loss

Unrealized Loss

An unrealized loss is a “paper” loss that occurs when an asset you own declines in market value but is not sold. The loss remains unrealized until you dispose of the asset; only then does it become a realized loss that can affect taxes and be formally recorded as a loss.

Key takeaways

• Unrealized losses reflect declines in market value for assets still held, not actual losses until sold.
• They become realized losses when the asset is sold for less than its purchase price.
• Accounting treatment depends on the security type and applicable accounting standards.
• For tax purposes, capital losses are generally deductible only when realized; tax treatment varies by jurisdiction.

How unrealized losses work

When the market price of an owned asset falls below its purchase price, the difference is an unrealized loss. Investors may leave positions open hoping for a recovery, which would erase the paper loss or turn it into a gain. If the asset is sold while below the purchase price, the unrealized loss becomes a realized loss.

You can calculate an unrealized loss over any period by comparing the acquisition cost to the asset’s current market value. For diversified portfolios, unrealized gains in some holdings can offset unrealized losses in others, reducing the portfolio-level impact.

Behavioral effects

Holding unrealized losses often affects investor behavior differently than holding gains. Common biases include:
* Loss aversion — preference to avoid realizing losses.
* Disposition effect — tendency to hold losing investments too long and sell winners too soon.
These behaviors can lead investors to take on extra risk or cling to underperforming assets instead of making rational portfolio decisions.

Accounting treatment

Accounting treatment varies by the classification of the security:
* Held-to-maturity securities: typically not remeasured to market; unrealized losses may not be reflected in earnings.
Trading securities: usually recorded at fair value with unrealized gains and losses flowing through earnings.
Available-for-sale securities: historically recorded at fair value with unrealized gains/losses reported outside earnings (treatment varies by accounting standards).

The specifics depend on applicable accounting frameworks and company classification choices.

Tax consequences

Unrealized losses generally have no immediate tax effect. Tax rules typically recognize capital losses only when realized (upon sale). Realized capital losses can often be used to:
* Offset realized capital gains in the same year.
Reduce taxable income subject to limits in some jurisdictions.
Be carried forward to offset future gains, according to local tax rules.

Always consult local tax guidance or a tax advisor for specific limits and rules.

Example

An investor buys 1,000 shares at $10 each (cost = $10,000). The price falls to $6:
* Unrealized loss = (10 − 6) × 1,000 = $4,000.
If the price later rises to $8 and the investor sells:
* Realized loss = (10 − 8) × 1,000 = $2,000.
Tax and accounting effects apply based on when the loss became realized and the applicable rules.

Practical considerations

• Evaluate whether the underlying fundamentals support recovery before selling.
• Use diversification to reduce the risk that any single unrealized loss harms the portfolio.
• Consider tax-loss harvesting when appropriate to realize losses for tax benefits.
• Avoid increasing exposure to a losing position solely to recoup past losses (sunk-cost fallacy).
• Rebalance periodically to maintain desired asset allocation and risk profile.

Conclusion

An unrealized loss is a not-yet-realized decline in an asset’s market value. It becomes materially important when you sell the asset (realizing the loss), when accounting rules require mark-to-market recognition, or when tax strategies make realizing losses advantageous. Understand the behavioral, accounting, and tax implications before deciding to hold or sell.