Realized Gain

A realized gain is a gain one earns by selling an asset higher than the original purchase price. When one sells an asset at a higher price than its actual purchase price, it achieves a realized gain, which increases the current assets. This gain is taxable since the seller benefits from the transaction. An unrealized gain is not taxable since one can value it at its fair market value. Only when one sells the asset is the gain realized until it is unrealized.

• A realized gain refers to a profit earned by selling an asset at a higher price than the original price. 
• The realized gain is taxable as the seller gets an advantage from the transaction. In comparison, an unrealized income is not taxable since one can value it at its fair market value only, and also, when one sells the asset is, the gain realized until it is unrealized.
• When the asset/stock liquidates, it is a realized gain. 
• One must consider realized gains if the asset sell, donated or scrapped, and they are taxable, unlike unrealized gains that are not taxed.

The below illustration best explains the difference between unrealized and realized gain/loss: -

The trade enters when one brings the stock and a new business starts. The stock value can go up or down during the transaction, depending on the market conditions. If the value of the stock goes up, it is called an unrealized gain, and when the value of the stock goes down, it is called an unrealized loss.

Unrealized gain/loss, as the word suggests, is unrealized, and the stockholder is not making an actual profit or loss. An unrealized gain/loss is when the trade is still ‘in progress and is not in the final state unless the stockholder sells it. Then, the transaction ends when the stockholder decides to sell it at a higher rate than what he bought it for.

The stock sold at a higher value is a realized gain since the stockholder has ended trade and made money from the transaction. Conversely, if the stock value had been lower than the value he bought, it would have been a realized loss.

Since it is the gain earned by selling the asset or stock at a higher price than the original purchase price, the formula will be as below: -

The following are examples to understand this gain better: -

Example #1 - Stock

You bought shares worth $1,000 of ABC Inc. A year later, the market moves upward, and you sell it for $1,500. Calculate the realized gain.

The calculation would be as follows-

• Realized Gain Formula = Sale Price of the shares - Purchase price of the shares
• = $1,500 - $1,000
• = $500

The realized gain is $500 since you sold the shares. There has been an appreciation in the share value.

Example #2 - Asset

An avid car enthusiast, James bought a scrapped Ferrari 250 GT California in 1961 at $90,000. He refurbished the car to its stock condition by investing $350,000. He had to shell out another $60,000 on the vehicle’s documentation and environment clearance. The total investment in the car now is $500,000. The car looked as good as new. James had people quoting for his car, starting at $2,000,000. Another offer from Andrew was $2,500,000, and James sold the car at $2,500,000 to Andrew.

The calculation is as below:

• Realized gain Formula= Sale Price of the Asset – Original Purchase Price of the Asset
• = $2,500,000 – (Purchase Price + Cost of Refurbishing + Cost of Documentation)
• = $2,500,000 – ($90,000 + $350,000 + $60,000)
• = $2,500,000 – $500,000
• = $2,000,000

The realized gain for James by selling the car is $2,000,000 since he had not just bought the car but also invested in bringing back the car from scrap to a refurbished condition as good as new. Therefore, James had an unrealized gain at the time of the quote for the vehicle, which was at $2,000,000. But as soon as he sold the car for $2,500,000, he realized a gain.

• When the price of the asset increases, the realized gain increases if one sells the asset.
• If another asset or stock is underperforming, one can cover the loss with the gain earned by the realized gain.
• They are profits and must reflect in the book of accounts, which would eventually result in higher organizational profit levels.

• It is an income and hence attracts tax on the revenue generated.
• The higher the realized gain higher is the applicable tax.
• Once the transaction ends, one achieves the realized gain by selling the stock/asset. However, it might have been higher if the price had gone higher depending on the market conditions.

• When the asset/stock liquidates, i.e., converted to cash, it is a realized gain if the asset/stock sells at a higher price than its original value.
• It is taxable.
• The organization may delay selling an asset if the realized gain is high, attracting high taxes. In the same way, it may sell assets where it has incurred realized loss. Such transactions will help the organization reduce or no taxes, depending on the situation.
• It is the end of a transaction where the seller gains from selling the asset/stock.

• The increase in the value of an asset over and above the book value is known as realized gain.
• One must consider it only when the asset sell, donated, or scrapped.
• Unless the asset sells, the gain is considered an unrealized gain.
• They are taxable, unlike unrealized gains, which cannot be taxed.
• Realized gains can offset realized losses.

This article is a guide to what is Realized Gain. We discuss the realized gain formula, examples, realized gain loss, advantages, and disadvantages. You can learn more about finance from the following articles: -

• Gain Formula
• In the Money Example
• Trading vs. Investing
• Is Dividend Expense?
• Discount Broker