An unrealized gain is an increase in the value of an asset that has not been sold. It is, in essence, a "paper profit." When an asset is sold, it becomes a realized gain. The presence of an unrealized gain may reflect a decision to hold an asset in expectation of further gains, rather than converting it to cash now. The holding decision may also involve an expectation that a longer holding period will result in a lower tax rate, as is the case with the longer holding period required for the capital gains tax.
For example, ABC Company owns an investment that cost $100,000, but which now has a market value of $120,000. ABC therefore has an unrealized gain of $20,000.
Later, ABC needs cash and therefore elects to sell the investment for $120,000. ABC now has a realized gain of $20,000, on which it must now pay taxes.
A common example of an unrealized gain is an increase in the price of shares designated as available-for-sale by the holder of the shares. The accounting for this type of unrealized gain is to debit the asset account Available-for-Sale Securities and credit the Accumulated Other Comprehensive Income account in the general ledger.
An unrealized gain is also known as a paper gain or paper profit, since the gain or loss has not yet been translated into money.