Realized Gain

Definition

A realized gain is the profit that results when an asset is sold for a higher price than its purchase price. The gain is considered “realized” because the transaction involving the sale of the asset has been completed. However, this gain is not necessarily subject to immediate taxation, as the tax treatment of realized gain depends on various factors such as the type of asset, the holding period, and applicable tax laws.

Examples

Stock Sale: If you purchase shares of stock for $1,000 and later sell them for $1,500, you have a realized gain of $500.
Real Estate Sale: Buying a piece of real estate for $200,000 and selling it for $250,000 results in a realized gain of $50,000.
Business Asset Sale: A company purchases machinery for $5,000 and sells it for $7,000, thus realizing a gain of $2,000.

Frequently Asked Questions (FAQs)

Q1: Is realized gain always taxable?

A1: No, not all realized gains are immediately taxable. Taxation depends on various factors, including the type of asset and holding period.

Q2: How is realized gain different from recognized gain?

A2: A realized gain is the profit earned from the actual transaction of selling an asset. A recognized gain is the portion of the realized gain that is required to be reported on your tax return.

Q3: Can realized gains be offset by realized losses?

A3: Yes, in many tax systems, realized losses can offset realized gains to lower the taxable amount.

Q4: How are long-term and short-term realized gains taxed differently?

A4: Long-term realized gains (assets held for over a year) often benefit from lower tax rates compared to short-term realized gains (assets held for less than a year), which are usually taxed at ordinary income tax rates.

Q5: What is the impact of holding periods on realized gain taxation?

A5: The holding period can determine whether a realized gain qualifies for long-term or short-term capital gains tax rates, which can significantly affect the amount of tax owed.

Boot: Additional cash or other property included in a transaction to make the values of exchanged properties equal.
Recognized Gain: The portion of a realized gain that is subject to tax and must be reported on the taxpayer’s income tax return.
Capital Gain: The profit earned from the sale of an investment or asset.
Unrealized Gain: An increase in the value of an asset that has not been sold yet and, therefore, has not been converted into a cash gain.
Fair Market Value: The price at which an asset would sell in the open market.

Online References

Suggested Books for Further Studies

Federal Income Taxation by Joseph Bankman
Taxation and Business Planning for Real Estate Transactions by Bradley T. Borden
Essentials of Corporate Finance by Stephen Ross, Randolph Westerfield, Bradford Jordan

Fundamentals of Realized Gain: Accounting and Taxation Basics Quiz

### What defines a realized gain? - [x] Profit from the sale of an asset - [ ] An increase in an asset’s value that hasn't been sold - [ ] Dividend payouts received from an investment - [ ] Interest earned from a savings account > **Explanation:** A realized gain is the profit that results when an asset is sold for more than its purchase price. ### Is a realized gain always taxable? - [ ] Yes, all realized gains are immediately taxable. - [x] No, not all realized gains are immediately taxable. - [ ] It depends on the original purchase price. - [ ] Realized gains are never taxable. > **Explanation:** Not all realized gains are immediately taxable; it depends on factors like the type of asset and the holding period. ### How would you categorize a gain from selling shares of stock? - [ ] Unrealized gain - [x] Realized gain - [ ] Recognized liability - [ ] Deferred revenue > **Explanation:** Profit earned from selling shares is a realized gain as the transaction is complete. ### What term describes the portion of a realized gain that must be reported for tax purposes? - [ ] Deferred gain - [x] Recognized gain - [ ] Exempt gain - [ ] Unrealized gain > **Explanation:** A recognized gain is the portion of the realized gain that is subject to tax and reportable. ### What can be used to lower the taxable amount of realized gains? - [ ] Depreciation expense - [ ] Operational expenses - [x] Realized losses - [ ] Deferred revenue > **Explanation:** Realized losses can offset realized gains, thereby reducing the taxable amount. ### What determines whether a realized gain qualifies as long-term or short-term? - [x] The holding period of the asset - [ ] The type of asset - [ ] The purchase price of the asset - [ ] The market conditions > **Explanation:** The holding period (i.e., how long the asset was held before selling) determines whether a gain is long-term or short-term. ### What type of gain involves an asset’s increased value that hasn’t been sold? - [x] Unrealized gain - [ ] Realized gain - [ ] Recognized gain - [ ] Earned revenue > **Explanation:** An unrealized gain is an increase in an asset's value that hasn’t been sold. ### What happens to realized gains that are not recognized? - [ ] They are reported as income. - [x] They defer tax until further notice. - [ ] They are immediately taxed. - [ ] They remain untaxed indefinitely. > **Explanation:** Realized gains that are not recognized defer tax until certain conditions are met. ### What additional value is included in a transaction to equalize exchanged properties? - [x] Boot - [ ] Premium - [ ] Dividend - [ ] Equity > **Explanation:** Boot is additional cash or property used to equalize the value of exchanged properties. ### Which federal entity provides guidelines on reporting capital gains? - [ ] Federal Reserve - [ ] Securities and Exchange Commission (SEC) - [x] Internal Revenue Service (IRS) - [ ] Financial Industry Regulatory Authority (FINRA) > **Explanation:** The IRS provides guidelines on how to report capital gains.