Realized Gain
A realized gain occurs when you sell an asset for more than its purchase price, converting a paper increase in value into actual profit. Realized gains create taxable events; by contrast, unrealized gains are increases in value while the asset is still held and are not taxed until the asset is sold.
Key takeaways
- Realized gains are actual profits recognized when an asset is sold above its cost (cost basis).
- Unrealized gains are “on-paper” increases in value for assets still held.
- Realized gains generally trigger tax liabilities; unrealized gains do not.
- Holding an asset for more than one year typically qualifies gains for lower long-term capital gains treatment.
- Selling at fair market value—often at arm’s length—ensures proper reporting and valuation.
How realized gains work
- Cost basis: The gain equals the sale proceeds minus the asset’s cost basis (purchase price plus adjustments).
- Realized loss: If sale proceeds are less than cost basis, the result is a realized loss.
- Types of assets: Realized gains apply to stocks, bonds, real estate, business assets, and other investments when sold.
- Tax event: Recognition of a realized gain usually increases taxable income for the period in which the sale occurs.
Tax considerations
- Short-term vs. long-term: Gains on assets held one year or less are typically taxed at ordinary income rates (short-term). Gains on assets held longer commonly qualify for lower long-term capital gains rates.
- Timing: The date of sale determines the tax year in which the gain must be reported. Timing sales near year-end can shift the tax liability between years.
- Planning: Investors may time sales, use tax-loss harvesting, or consider holding periods to manage tax exposure.
Impact on financial statements
- Balance sheet: Selling an asset removes it from noncurrent holdings and increases cash or current assets by the sale proceeds.
- Income statement: Realized gains are reported as part of income, increasing net income for the reporting period.
- Valuation and disclosure: Asset sales should reflect fair market value and, for related-party transactions, an arm’s length price to ensure accurate reporting.
Realized vs. unrealized gains — practical differences
- Realization: A realized gain is locked in by sale; an unrealized gain remains hypothetical until converted to cash.
- Decision factors: Investors may hold unrealized gains to defer taxes, seek additional appreciation, or obtain long-term tax treatment.
- Not the same as realized income: “Realized income” typically refers to earned income (wages, interest, dividends) that has been received, distinct from capital gains realized on asset sales.
Example
You buy a stock for $100 and sell it later for $150. The $50 difference is a realized gain and must be reported for tax purposes in the year of the sale. If you held the stock for more than one year, that $50 may qualify for long-term capital gains treatment.
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Bottom line
Understanding realized gains is essential for tax planning and financial reporting. Converting unrealized gains into realized gains locks in profit but usually creates a tax obligation. Effective timing and awareness of holding periods can help manage tax liabilities and support better investment and business decisions.