A holding gain is a gain in value that is generated by retaining ownership of an asset over a period of time. A holding gain does not refer to an upgrade of the asset itself - just a gain that accrues over time. A holding gain may be generated for a variety of reasons, including the following:
- The general inflation of prices
- The restriction in the supply of the asset
- An increase in demand for the asset
- A future expectation of a change in the demand for or supply of an asset
For example, a company acquires a plot of land for $2,000,000 and retains its ownership of the land for 10 years. At the end of that time, the fair value of the land is $10,000,000, so the company has experienced a holding gain of $8,000,000, which is the difference between the two values.
Other examples of situations where holding gains can be derived are from holding precious jewels and metals, artwork, property, and commodities.
The entity retaining ownership of an asset that has experienced a holding gain can sell the asset, thereby realizing the holding gain by accepting cash or other assets in exchange for ownership of the asset. If the owner instead elects to retain the asset, the holding gain is said to be unrealized.