Unrealized gains refer to the increase in the value of an asset or investment that an individual holds but has not yet sold. These gains exist only on paper because the investment has not been converted into actual profit through a sale. The unrealized gain is the difference between the current market value of the asset and its original purchase price. Until the asset is sold, the gain remains "unrealized" and is not considered actual income or profit, meaning it generally has no immediate tax implications. Once the asset is sold, the unrealized gain becomes a realized gain, which may then be subject to taxes depending on the holding period and tax laws.

For example, if an investor buys 100 shares of a stock at $10 each ($1,000 total) and the shares increase in market value to $12 each, the investor has an unrealized gain of $200 ($12 - $10 = $2 gain per share times 100 shares). This gain is unrealized until the shares are sold.