Holding Gain
A holding gain refers to an increase in the value of an asset over the period it is held by an investor. This increase in value could be due to several factors like appreciation in the market price of the asset, currency exchange rate changes, or other market conditions.
Holding gains can be realized or unrealized:
- Realized Holding Gain: A realized holding gain occurs when an asset is actually sold for more than its purchase price. The gain is “realized” because it has been converted into cash or cash equivalent.
- Unrealized Holding Gain: An unrealized holding gain occurs when the market price of an asset increases, but the asset has not been sold. The gain is “unrealized” because it exists on paper, but has not been converted into cash.
It’s important to note that taxes often come into play with holding gains. Realized gains are typically subject to capital gains tax, while unrealized gains are typically not taxed until they are realized.
For example, if you buy a stock for $50 and it increases to $60, you have an unrealized holding gain of $10. If you then sell the stock at $60, you realize the holding gain, which becomes a $10 realized holding gain. This realized gain is usually subject to capital gains tax.
Example of a Holding Gain
Let’s use the example of buying and selling stocks.
Imagine that in January 2023, you purchase 100 shares of a company’s stock at $20 per share, so your total investment is $2,000.
By December 2023, the price per share has risen to $30. At this point, you have an unrealized holding gain because the value of your stock has increased, but you haven’t sold your shares yet. The unrealized gain would be $10 per share (the difference between the current price of $30 and your purchase price of $20), multiplied by 100 shares, so $1,000 in total.
If you decide to sell your shares in December 2023 at the $30 per share price, you would then have a realized holding gain of $1,000, because you’ve sold the shares and “realized” the gain. You’d receive $3,000 from the sale (100 shares * $30/share), and because you initially paid $2,000 for the shares, your realized gain is $1,000 ($3,000 – $2,000).
This realized gain is typically subject to capital gains tax. The tax rate can depend on several factors, including how long you held the asset (in this case, less than a year, so it would be a short-term capital gain) and your overall taxable income.
