How are unrealized gains different from realized gains?

How are unrealized gains different from realized gains?

• A. Unrealized gains are after selling; realized are before selling.
• B. Unrealized gains are increases in value not yet sold; realized gains occur after selling.
• C. They are the same.
• D. Unrealized gains are guaranteed profits.

Answer: (B)

The main idea here is that profit is only real when you actually sell. Unrealized gains are the increases in value on assets you still own—the profit exists on paper but isn’t locked in yet because you haven’t sold. Realized gains occur after you sell the asset, at which point the profit (sale price minus your cost) is actual and concrete. The best statement captures this timing distinction: gains that reflect value changes while you haven’t sold are unrealized, and gains only become realized once a sale has occurred. The other ideas mix up when the gain is set in stone or wrongly imply profits are guaranteed, which isn’t the case since market prices can change before you sell.

The main idea here is that profit is only real when you actually sell. Unrealized gains are the increases in value on assets you still own—the profit exists on paper but isn’t locked in yet because you haven’t sold. Realized gains occur after you sell the asset, at which point the profit (sale price minus your cost) is actual and concrete. The best statement captures this timing distinction: gains that reflect value changes while you haven’t sold are unrealized, and gains only become realized once a sale has occurred. The other ideas mix up when the gain is set in stone or wrongly imply profits are guaranteed, which isn’t the case since market prices can change before you sell.