Unrealised profit or loss: what are they & how do they work?

Your unrealised profit or loss becomes an important concept, especially when investing or trading in the share market. Investors take it into account to determine if they want to continue holding onto their shares or if it is already time to square off their position.

Read on to understand unrealised profit or loss in detail.

What is Unrealised Profit?

When the value of your investment increases and you continue to hold onto it, the increased value above the cost is your unrealised profit. It often happens in the case of stocks where investors continue to hold their investments, and the value rises over time. In other words, it is a possibility of profits that an investor can make and not the actual profit that they make.

What is Unrealised Loss?

With every possibility of profit, there is also a chance to incur losses. Just like unrealised profit, which takes place when there is an increase in the value of investments, unrealised loss comes into effect when there is a decrease in the value of such assets. When the value of the asset goes below your cost of investment, and you continue to hold onto it, it is your unrealised loss. 

Difference Between Realised and Unrealised Profit

As long as you continue to hold your assets with increased value, it is your unrealised profit. However, once you sell over the investment, any profit you make on the sale is realised profit. 

Here are some key differences between realised and unrealised profits:

How to Calculate Unrealised Profit and Loss?

The formula to calculate unrealised profits and losses is very simple. It is the difference between the market value of an investment and the cost to acquire it. We can therefore derive the formula as:

Unrealised Profit = Market price / Fair value of Stock - Cost of investment

If the resulting figure turns out to be negative, it would be treated as an unrealised loss.

Unrealised Profit and Loss Example

To better understand unrealised profit or loss, let’s take an example. 

Let’s say an investor purchased 1000 shares of M Ltd at ₹100 shares each on 1st January 2023. After holding onto the shares for 6 months, he sees that the value of the stock has increased to ₹150 per share. If the investor continues to hold the shares, the increase of ₹50 per share will be his unrealised profit. 

Using the above formula, the total value of his unrealised profit will be as follows:

Unrealised profit = (1000 * 150) - (1000*100)

                               = ₹150,000 - ₹100,000

                               = ₹50,000

Now, continuing with the same example, let’s assume that the value of those shares comes down to ₹90 per share on 10th October 2023. In this case, the value of the unrealised loss would be ₹10,000. This can continue to change as long as the investor holds the shares. Once he decides to sell them, it would be his realised profit or loss.

Final Word

Unrealised profit or loss carries no tax implication as long as the investor does not sell their investments. If you have high unrealised profits, you can plan to sell your investments gradually to bring down your tax liability. Also, if you choose to convert your unrealised losses to realised losses, you can carry them forward to upcoming financial years and set them off with your gains of those years.

Frequently Asked Questions

What is unrealised profit?

Ans. When the value of an investment increases above the cost of investment, that is unrealised profit. It is the possibility of profits an investor can make if they sell their investment at that point.

How do you calculate unrealised profit and loss?

Ans. You can calculate unrealised profit or loss by finding the difference between the market value of the stock and the price at which you bought it. 

What is unrealised profit vs realised profit?

Ans. Realised profit is the actual profit that an investor makes on the sale of their stocks. On the other hand, unrealised profit is the profit they can make if they sell the asset but haven’t yet.

What is an example of an unrealised loss?

Ans. If you buy a share at ₹150 and the next day, its value comes down to ₹130, then ₹(150 - 130) = ₹20 would be your unrealised loss. If you sell the share at a loss of ₹20, it will become your realised or actual loss.