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Unrealized Loss

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An unrealized loss is a loss on an investment that has not yet been effected, ie, a "paper loss." For example, suppose 10 shares of stock are bought at $8 per share on May 8. If on May 20 the stock price is $6, the unrealized loss is 10 X $2, or $20. The unrealized loss only becomes an actual loss when the stock is sold. An unrealized loss can have various implications for tax and business strategy. For example, investors often decide to convert an unrealized loss into an actual loss to offset realized capital gains and thus reduce their tax burden. On the other hand, companies are often required to disclose an unrealized loss (such as on marketable securities) in their financial statements. An unrealized loss poses major issues for accountants. Although an unrealized loss may theoretically exist only on paper, there may be little chance that the loss will be recovered. In that case, an auditor will consider an unrealized loss an actual loss for financial statement purposes.



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