How to account for unrealised capital gains in your net worth

Your equities are up R210,000 since you bought them. You have not sold anything. Two fair questions follow: did you actually get R210,000 richer, and if so, where does that number live in your books? The short answer is that yes, it counts toward your net worth, but it is not income, and the most common mistake is to treat it as if it were. This piece is the companion to our cornerstone on tracking wealth honestly, and it is about getting one entry right so the rest of your picture stays trustworthy.

Three words people use interchangeably, and shouldn't

Most of the confusion here dissolves once you separate three terms that sound similar and mean different things:

• Unrealised: the value of an asset you still hold has gone up. A paper gain. You have not sold, so you have not locked anything in.[1]

• Realised: you sold, and the gain has crystallised into actual proceeds.[1]

• Recognised: you have recorded it in your books. In the formal definition, recognition is "the process of capturing, for inclusion in the statement of financial position or the statement(s) of financial performance, an item that meets the definition of an asset, a liability, equity, income or expenses."[2]

The point that clears the fog: a gain can be recognised while it is still unrealised. Marking your shares up in your books records the gain even though you have not sold. Recognised and realised are not the same event. Your R210,000 is unrealised (unsold) and, once you write it into your books, recognised, and that is entirely legitimate.

Marking to market: what number do you even use?

To record a paper gain you need a value for the asset today, and the convention is fair value, "the price that would be received to sell an asset… in an orderly transaction between market participants at the measurement date."[3] For a listed holding that is simply its market value at your statement date. This is "mark-to-market", and it is why a proper net worth uses what your assets are worth now, not what you paid: market value, not book value.

The one entry that keeps everything balanced

Now the mechanism, and it is worth seeing because it explains why a paper gain lifts your net worth without being income. Your books run on the identity Assets = Liabilities + Equity, which must stay balanced after every entry. So when you mark an asset up, something else has to move by the same amount. Under the treatment this series uses, the analogue of the accounting standard for revaluing an asset upward, the offset is a revaluation reserve inside equity:[4]

Dr Investment asset (market value up) R210,000 Cr Revaluation reserve, equity R210,000

Both sides of the equation rise by R210,000. Assets up, equity up, books balanced. Your net worth increases by the gain, correctly, and not a rand of it touches your income statement.[4]

Why route it through a reserve rather than through income? Because it keeps "what the market did" out of your operating surplus, so your genuine saving (income minus expenses) is not polluted by paper gains. That separation is the entire "was it me or the market?" payoff. One honest caveat, in keeping with this series' habit of flagging judgement calls: the standards actually permit two routes. Some assets are revalued through a reserve like this; others have fair-value changes run through profit or loss.[5] A household could legitimately choose either. I recommend the reserve route specifically because it preserves the saving-versus-market split; the important thing is to pick one convention and hold it consistently, not that there is a single "correct" answer handed down.

The worked household, briefly

In the household we use across this series, a year's paper movements looked like this: local equities up R210,000, offshore up, the retirement annuity and the house up, the vehicle down R90,000 as it depreciated. All of it went to the revaluation reserve, the losses as well as the gains, because a mark-down works the same way in reverse.[6] None of it touched income. It is the reason that household's net worth grew R1.1m in a year while its actual saving was only R350,180: the other R750,000 was exactly this, recognised, unrealised, sitting in the revaluation reserve where it belongs.

The three mistakes that double-count a paper gain

Get the entry right and you avoid three errors that quietly corrupt a home-grown tracker:

1. Treating the paper gain as income. Run that R210,000 through your income statement and your savings rate is nonsense: it looks as if you saved R210,000 you never earned. A revaluation is an equity item, not income.[7]

2. Double-counting it. Record the gain in the revaluation reserve and again as income, or again when you finally sell, and you have counted the same money twice. Keeping it in one clearly-labelled place is what prevents this.[7]

3. Forgetting to reverse on sale. When you eventually sell, the gain moves from unrealised to realised: you clear the revaluation reserve and recognise the actual result. Skip that step and the gain lingers in your books after the cash has already arrived, counted twice again.

A word on tax, and where it belongs

Two things worth flagging, and no more than flagging, because tax is its own subject. As a general principle, unrealised gains are usually not taxable until you realise them: a paper gain is normally an accounting event, not a taxable one.[8] The South African wrinkle is that there are "deemed disposal" rules that can trigger capital gains tax without an actual sale, notably on ceasing to be a South African tax resident, and on death. That is a genuine and important exception, but the section references and the actual capital-gains-tax arithmetic belong in a dedicated tax piece, not here; this article is about where the gain lives in your books, not what SARS does with it. We will treat the tax mechanics properly in their own article.

So what should you actually do?

If you take one habit from this: when an asset you still hold changes value, record it, at market value, to a revaluation reserve in equity, never through income. That single discipline keeps your net worth honest (it moves with the market, as it should), keeps your savings figure clean (paper gains stay out of it), and keeps you from the double-counting that catches almost everyone who tracks this by hand. Realised, unrealised, recognised: three different things, kept in three different places. That is the sort of rigour we built Monverdo to apply to your wealth automatically.