Smart position sizing & risk management

Back to glossary
Risk Management

Unrealized vs Realized P&L

Unrealized P&L is the profit or loss on positions you still hold. Realized P&L is from positions you have closed. You only get taxed on realized gains.

Unrealized vs Realized P&L

Your profit and loss (P&L) falls into two categories depending on whether you have closed the trade or are still holding it.

Unrealized P&L (paper gains/losses)

  • The profit or loss on positions you currently hold
  • Changes every time the stock price moves
  • Not taxable until you sell
  • Also called "paper gains" or "paper losses" because they only exist on paper until you close the trade

Realized P&L

  • The profit or loss on positions you have closed (sold)
  • Locked in permanently once the trade is closed
  • This is what you pay taxes on (capital gains) or deduct (capital losses)
  • This is what matters for your actual trading performance

Example

You buy 100 shares of TSLA at $200. It rises to $220. You have $2,000 in unrealized profit. If you sell, that becomes $2,000 in realized profit. If TSLA drops back to $200 before you sell, your unrealized profit goes to $0. You made nothing.

Why this matters

  • Unrealized gains are not real until you sell: watching a winner turn into a loser because you did not take profits is one of the most common mistakes in trading
  • Tax planning: you can control when you realize gains and losses. Selling losers before year-end to offset gains is called tax loss harvesting
  • Performance tracking: your trading journal should track realized P&L, not unrealized. Open positions are still in play
"You never go broke taking a profit" is about converting unrealized gains into realized gains. An unrealized gain can disappear. A realized gain is in your account.