"Amount recognized" is a term that is used in finance circles to identify the amount of capital gains or losses that are experienced by a taxpayer over the course of a specific tax year. This figure will not only include the gains or losses incurred from selling a capital investment, but also any related fees and charges that were absorbed as part of that transaction. The purpose of assessing the amount recognized is to aid in properly calculating the amount of tax that is due as the result of the purchase or sale of a capital investment.
While both the amount recognized and the amount realized are somewhat similar, the two figures are used in different ways in terms of the accounting surrounding the purchase or sale of a capital investment. The amount realized will focus on the return or loss that resulted from the transaction itself, while the amount recognized will have more to do with the components of the transaction that are subject to some type of taxation. In some cases, the two figures may in fact be the same, but it is also possible for those amounts to vary, based on current tax laws and how they relate to the transaction under consideration.
A true amount recognized focuses more on recognized gain than loss, although the end result of the calculations may reflect a gain or a loss. In the event that some sort of gain took place, this means that some portion of that gain will be subject to taxation. Should the transaction post a loss, then there is little chance of taxes being owed. With a loss, there is also the possibility that the investor may be able to claim some sort of deduction that will help alleviate some of the tax burden associated with gains on other investments.
Properly assessing the tax implications related to an amount recognized requires understanding how the gain or loss will be treated under current tax laws. Depending on the nature of those current laws and regulations, taking the time to consult with a tax professional will often aid the investor in properly applying those regulations and being able to make use of the gain or loss to best advantage. By reporting the proper amount recognized on tax returns, the chances of being the subject of an audit or ending up paying a penalty to a revenue agency is greatly diminished.
