Realized Loss: What It Means and How It Works

What is a realized loss?

A realized loss occurs when an asset is sold, scrapped, or otherwise disposed of for less than its original purchase price (cost or book value). It contrasts with an unrealized loss, which exists only on paper while the asset is still held.

Key points

• Realized loss = sale price (or disposition value) < purchase price (or carrying amount).
• Unrealized loss = decline in value while the asset is still owned; it does not affect taxes until realized.
• Realized losses can be used to offset realized gains for tax purposes and may reduce taxable income under applicable tax rules.
• Businesses and investors sometimes time disposals to realize losses when it is tax-advantageous.

Investor example

An investor buys 50 shares of XYZ at $249.50 per share. If the investor sells them later at $215.41, the realized loss is:
50 × ($249.50 − $215.41) = $1,704.50.

If the same investor also realizes a gain selling 50 shares of ABC bought at $201.07 and sold at $336.06, that gain is:
50 × ($336.06 − $201.07) = $6,749.50.

Applying the realized loss against the gain reduces the taxable gain:
$6,749.50 − $1,704.50 = $5,045.00.

Tax implications (U.S. context)

• Realized capital losses can offset realized capital gains dollar-for-dollar.
• If total realized losses exceed realized gains in a tax year, individuals in the U.S. can typically deduct up to $3,000 of the excess loss against ordinary income ($1,500 if married filing separately). Remaining unused losses may be carried forward to future years until fully used.
• Specific rules vary by jurisdiction and by the type and holding period of the asset (short-term vs. long-term). Consult tax guidance or a tax advisor for your situation.

Tax-loss harvesting

Tax-loss harvesting is the practice of selling investments at a loss to realize tax benefits (for example, to offset gains or reduce taxable income). Many brokerage platforms offer tools to identify and manage opportunities for harvesting losses. Be mindful of wash-sale rules and other regulations that may limit the tax benefits of repurchasing substantially identical securities within a restricted timeframe.

How realized loss works for businesses

• For companies, a realized loss occurs when an asset is removed from the balance sheet at a value below its carrying amount—usually because it was sold, scrapped, or donated.
• Realized losses may reduce taxable income and can be strategically timed by businesses to offset profits in periods with higher tax liabilities.
• Accounting rules govern how losses are recognized on financial statements; tax rules determine how and when losses can be used to offset taxable income or gains.

Takeaways

• Only a disposal (sale, scrap, donation) makes a paper loss into a realized loss that can affect taxes.
• Realized losses can offset gains and, up to certain limits, reduce ordinary income for tax purposes.
• Strategies like tax-loss harvesting use realized losses to manage tax liabilities, but they must be executed within tax and accounting rules.

Sources

• IRS Publication 544 — Sales and Other Dispositions of Assets
• IRS Topic No. 409 — Capital Gains and Losses