More about realized & unrealized gains & losses
Understand the tax implications
A fund's realized and unrealized capital gains and losses can provide helpful information about the tax implications of holding a particular fund in a taxable account. (These tax implications don't apply to investors holding a fund in a tax-deferred account, such as an IRA or employer-sponsored retirement plan.)
Realized gains & losses
A realized capital gain (or loss) is an increase (or decrease) in the value of a security that is "real" because the security has been sold by the portfolio manager. The capital gains and losses are "realized" by the fund, and any distributions to shareholders as a result of realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold.
Realized losses can be used to offset realized gains in an attempt to reduce taxable gains. If realized losses are higher than realized gains, a fund can "carry forward" these excess losses to offset future gains.
Unrealized gains & losses
An unrealized capital gain (or loss)—also called a "paper profit or loss"—is an increase (or decrease) in the value of a security that isn't "real" because the security hasn't been sold. When a portfolio manager sells a security, however, the capital gains and losses become "realized" by the fund, and any realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold.
Funds with low turnover rates, such as index funds, tend to have more unrealized gains than actively managed funds and are less likely to pass taxable gains on to investors.
A fund's unrealized appreciation or depreciation figures are valuable because they can give an idea of whether a fund would need to distribute any gains if all of its securities were sold. Such information may help you determine your potential exposure to taxable distributions.