The government tax revenue authorities demand a piece of your income; and they expect their tax cut when you realize a profit. This cut is known as a Capital Gains tax on your investments.
For tax purposes, you must understand the difference between an unrealized gain and a realized gain. A realized gain becomes realized when you sell the asset or investment at a profit. For example, you realize a gain on the sale of a home if you purchase it for $1M and sell it for $1.5M and your gain is $500,000. The tax on the capital gains only happens when the asset or investment is sold or realized.
For tax purposes, an unrealized gain is a potential profit that exists on paper only. An unrealized gain is a potential profit that exists on paper – an increase in the value of asset or investment you own but have not sold or realized a profit yet. For example, you purchase bitcoin and a year later the bitcoin is worth 20% more than you paid for it. Although your investment has increased in value by 20%, your gain is unrealized since you still own it.
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