A realized gain is any asset sold at a higher price than its purchase price. The amount realized from a gain is considered a taxable event, and may be subject to different types of capital gains tax. Conversely, a realized loss is an asset sold at a lower price than it was purchased for, resulting in capital loss. To minimize taxes, realized losses may be applied toward realized gains. A realized gain applies both to personal finances as well as corporate finances.
A variety of investments—real estate, stocks, bonds, mutual funds—are subject to fluctuation in worth, resulting in capital gains or losses. An asset sold with a capital gain becomes a realized gain. If an asset experiences a capital gain, but is not sold, it is considered an unrealized gain. Likewise, an unsold asset with a capital loss is referred to as an unrealized loss.
Unrealized capital gains are not a taxable event, whereas realized gains are. Capital gains taxes are typically levied on an annual basis, and take into account an investor's overall amount realized. This makes it possible for investors' realized losses to cancel out their realized gains, thus resulting in no capital gains tax. Savvy investors know this, and often sell their assets in a time and sequence that's likely to minimize taxes. Another instance in which a realized gain may be canceled out is during corporate liquidation, when a bankrupt company sells their assets in order to pay off creditors.
The amount realized in the selling of an asset is not always as simple as comparing the original purchasing price to the selling one. Investments often come attached with costs that have to be factored in to accurately calculate the amount realized. For example, a company might be selling at a far higher price than what was paid, but after factoring in debt, the sale may not actually generate a very profitable realized gain. On the other hand, a new owner may opt to assume debts as a part of the purchasing deal. For the old owner, the transfer of debts to a new owner, plus the selling price of his or her business, may result in a much greater realized gain. These types of complex asset transactions often occur in real estate as well.
Capital gains taxes on realized gains vary from country to country. Belize, for example, has no capital gains taxes. In some banking and market transactions, assets may be tax exempt. This may be done to help stimulate market activity and economic growth.
