Accounting for Realized & Unrealized Gains

• Unrealized gains or losses refer to the increase or decrease in the value of different company assets that have not been sold yet. Once they are sold the gain or loss is “realized.”
  • The accounting treatment depends on whether the assets are:
    • Held to Maturity securities - securities intended to be held to maturity
      • Value: amortized to cost
      • No impact to Balance Sheet/Income Statement/Cash Flow Statement
    • Trading securities - securities acquired with the intent not to be held to maturity, but to profit with over the near term
      • Value: Fair value
      • Impacts Balance Sheet, impacts net income and shows up on Income Statement
      • No impact to Cash Flow statement
    • Available for Sale securities - securities that are not expected to be either held to maturity or traded in the near term. It is the catch-all category that falls in the middle of the prior two.
      • Value: Fair value
      • Impacts Balance sheet
      • No impact to Income Statement or Cash Flow statement

Journal Entry Examples from YouTube video linked below

• Unrealized gains or losses impact the “Other Comprehensive Income” which is part of owner’s equity
  • “Comprehensive Income” = Non-owner changes to owner’s equity + Traditional income

• From the TaxBit article linked below:
  • If you’ve sold your crypto for fiat currency, debit your cash account
  • If you exchanged it for another digital asset, debit the new crypto account
  • Plug the difference into a capital gain or loss account to balance the transaction as necessary

Other Journal Entry Examples

The following answer from QuickBooks Support user JPaperman on the QuickBooks Support Thread linked below. Interpretation into journal entries is my work.

I create an other revenue account called “Unrealized Gains/Losses” and another for “Realized Gains/Losses”. For each of my investment accounts I then also create a sub account called “Market Adjustment”. As assets are bought they are debited to the Investment account at cost (I do keep the investments and cash holdings in separate accounts) - debit investments, credit cash for the same amount.

Chart of Accounts

When they are sold debit the cash for the sales price, credit the investment for the original cost (basis) and the difference goes into the “realized gains/losses” income account. This way the investment account always has the original cost basis for any assets held. Each month I then look at the market value of the investments compared to their original cost - I then debit/credit the “Market Adjustment” sub account for whatever amount is needed to bring it to the difference between the basis and market values with the other end of the transaction going into the “unrealized gain/loss” account.

Quick (maybe not so quick) example. I buy a stock for \$100 - debit the investment for \$100 credit the cash for \$100. I now have an investment with a market value of \$100 and an investment account showing \$100, no adjustment needed.

The stock value goes up to \$150. At the end of the month I now have a difference of \$50 so I debit the “market adjustment” account for \$50 and credit the “unrealized gain/loss” for \$50. My Activity Statement now shows a \$50 unrealized gain and the balance sheet shows a net investment value of \$150 (investment \$100 + adjustment sub account \$50).

The stock value then drops to \$130. At the end of the month I now have a difference of \$30 so I credit the market adjustment account to bring it down from the \$50 debit it already has to the new \$30 debit balance needed - credit \$20 and debit the unrealized gain/loss account for the \$20. For the month I have an unrealized loss of \$20 - the YTD net is \$30 gain (\$50 gain first month - \$20 loss this month). The balance sheet shows a \$130 investment value (\$100 investment + \$30 adjustment sub account).

Now the weird one, I sell the stock for \$125. I record the sale - debit cash \$125, credit the investment account for the cost of \$100 and credit “recognized gain/loss” for the \$25 difference.

The investment account now has a zero balance and I have zero market value investments - so I need a zero in the market adjustment account. It has a \$30 debit balance so I credit it \$30 and debit unrealized gains/losses for \$30.

The balances sheet now shows the zero investments and zero adjustment. The activity statement will have the \$25 realized gain and a \$30 unrealized loss (yes, that nets to this months drop in value from \$130 to \$125). YTD the activity statement will show a \$25 realized gain and a zero unrealized gain (\$50 gain first month - \$20 loss second month - \$30 loss this month) which is good because there are no longer any Unrealized gains/losses after it is sold.

So the eventual gain/loss gets recognized in the “recognized gain/loss” account when the asset is sold. The “unrealized gain/loss” account tracks the increases and decreases in value until you sell it at which point it zeroes out.