Legal Definitions - unrealized loss

An unrealized loss occurs when an asset you own decreases in value compared to its original purchase price or a previous valuation, but you have not yet sold or disposed of that asset. Because the asset has not been sold, the loss is considered "on paper" or "potential" rather than a final, actual loss. The loss only becomes "realized" if and when the asset is sold for less than its acquisition cost.

• Example 1 (Stock Market Investment):

  Maria purchased 200 shares of a technology company's stock at $75 per share, investing a total of $15,000. Several months later, due to a disappointing earnings report, the stock price dropped to $60 per share. Maria still holds all 200 shares.

  This situation represents an unrealized loss of $3,000. Although the current market value of her shares is $12,000 (200 shares * $60), which is $3,000 less than her original investment, the loss is not final because Maria has not sold the shares. If the stock price recovers, her potential loss could decrease or even turn into a gain.

• Example 2 (Real Estate):

  A couple, John and Emily, bought a vacation home for $400,000 in a popular coastal town. A year later, a new environmental regulation was passed that restricted development in the area, causing property values to decline. A recent market analysis suggests their home is now worth $370,000.

  John and Emily have an unrealized loss of $30,000. Their home's market value has decreased, but since they still own the property and have not sold it, the loss is not yet realized. They would only incur a realized loss if they sold the home for less than what they paid for it.

• Example 3 (Business Inventory):

  A clothing retailer purchased a large quantity of winter coats for $50,000 in anticipation of cold weather. However, an unusually warm winter led to very low demand for heavy coats. The retailer now estimates that the remaining inventory of coats can only be sold for $35,000 at a clearance sale.

  The retailer is facing an unrealized loss of $15,000 on their inventory. The value of the coats has decreased, but because they are still in the store's possession and have not yet been sold at the lower price, the loss is considered unrealized. The actual loss will only be finalized once the coats are sold.