What distinguishes realized gains from unrealized gains?

Realized gains are distinguished from unrealized gains primarily by the event of a sale or transaction involving an asset. When an asset is sold for more than its purchase price, the profit made from that sale is considered a realized gain. This is the point at which the economic benefit of the increase in value is converted into actual cash or cash equivalents.

On the contrary, unrealized gains arise when an asset appreciates in value but remains unsold. These gains reflect paper profits that exist on the balance sheet but do not yet represent actual cash flow or income. Since the asset has not been sold, there is no taxable event associated with unrealized gains, which remains a critical aspect of how they differ from realized gains.

This distinction is important for accounting and tax purposes, as only realized gains can be officially recognized in financial statements and are subject to taxation. As such, the correct understanding of these terms is essential for accurate financial reporting and analysis.