Unrealized holding loss definition

What is an Unrealized Holding Loss?

An unrealized holding loss is a decline in the value of an asset, where the loss has not yet been recognized. The loss would be realized once the asset is sold or disposed of in some other way. The owner of such an asset might elect to continue owning it, hoping that its value will eventually increase, thereby erasing the unrealized loss.

Only a realized holding loss can be used to offset a taxable gain for the purpose of reducing one's income tax liability.

Example of an Unrealized Holding Loss

Orange Corporation owns a security that cost $10,000, but which now has a market value of $8,000. Orange therefore has an unrealized holding loss of $2,000. A month later, the market value of the security has risen to $9,000, so Orange now has an unrealized holding loss of $1,000. Orange then sells the security for $9,000. At this point, it has a realized loss of $1,000. It no longer has an unrealized holding loss.

What is the Impact of Unrealized Holding Losses on Taxes?

Unrealized holding losses do not impact taxes directly because they represent a decrease in the value of an asset that has not been sold. For tax purposes, gains and losses are typically only recognized when they are realized, meaning the asset has been sold or otherwise disposed of. Unrealized losses are "paper losses" and do not reduce taxable income. Only when the asset is sold at a loss does it become a realized loss, which may then be deductible, depending on the asset type and tax rules.