Realized Gain Definition

A realized gain results from selling an asset at a price higher than the original purchase price. It occurs when an asset is sold at a level that would exceed its book value cost.

While an asset may be carried on a balance sheet at a level above cost, any gains while the asset is still being held are considered “unrealized” as the asset is only being valued at fair market value. If you’re selling an asset that results in a loss, this is referred to as a realized loss.

How Do Realized Gains Work?

  • Realized gains and unrealized gains differ in a number of different ways. An unrealized gain usually refers to a gain reported on a company’s financial statements and will appreciate the value of the specified asset on a company’s books.
  • Unrealized gains are typically not taxed. They add to an asset’s originally reported book value at the time of purchase and can occur on all types of assets and investments held by a company.

The assets are included in the company’s balance sheet, even so, they could be reported with or without the unrealized gains. Unrealized gains for an asset can be used to determine a selling price since these gains are added to the asset’s book valuation.

An asset’s value, held on the company’s books, most often includes the total unrealized gain for which it has received and appreciated above its originally booked price. However, unrealized gains may sometimes be off-balance sheet accruals allowing the asset to remain at book value until a sale.

Realized Gains And Unrealized Gains

While realized gains are actualized, an unrealized gain is a potential profit that exists on paper, which is the result of an investment. It is an increase in the value of an asset that has not been sold for cash yet, like a stock position that has increased in value but still remains open. A gain won’t become realized until that position is sold for a profit.

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When unrealized gains present, it usually means an investor believes the investment has room for higher future gains. If it was the opposite, he/she would sell now and recognize the current gain. Unrealized gains can come about because holding an investment for an extended time period lowers the tax burden of the gain.

If an investor holds a stock for longer than one year, his tax rate is reduced to the long-term capital gains tax. If an investor wants to move the capital gains tax burden to another tax year, he can sell the stock in January of the proceeding year versus selling in the current year.

Investors should also note the distinction between realized gains and realized income. Realized income refers to income that you have earned and received, such as income from wages or a salary as well as income from interest or dividend payments.

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