A realized gain is an important concept to understand when it comes to investing. It occurs when the sale of an asset or security produces a profit. When this gain is realized, or crystallized through the sale of the securities, the investor must pay taxes on their profits. So it’s important to know what type of gain you’re dealing with, and the applicable tax rate.

A realized gain is quite simple: it is the profit you make when an investment is sold for more than it was bought for. It is these gains that you must pay taxes on, as the Internal Revenue Service requires that you pay taxes on any gain from an appreciated asset. Realized gains can come from assets such as stocks, bonds, mutual funds, and commodities.

Realized gains are ultimately categorized as either short-term gains or long-term gains, depending on the amount of time that an investor holds the asset prior to sale. For stocks, for example, the cutoff for this holding period is one year. If you hold the security for more than one year, the gain is classified as long-term. Alternatively, gains on assets held for less than one year are considered short-term gains. Gain rates are different for short-term versus long-term gains.

It is important to distinguish between realized and unrealized gains. An unrealized gain occurs when you realize a gain in an investment without yet selling it. Say you buy a stock for $10 per share and it rises to $15 per share. That is an unrealized gain of $5 per share. If you were to hold this stock for longer than one year, you then would realize the gain, and it would be classified as a long-term gain.

In sum, the concept of realized gains can be confusing and fear inducing. But by understanding the difference between realized and unrealized gains and what type of taxes apply to each, investors can hone their understanding of taxes, and indeed make the most of their investments.