What Is a Realized Loss?
Let me explain to you what a realized loss really is. It's the loss you recognize when you sell an asset for a price that's lower than what you originally paid for it. This happens when an asset, bought at what's called its cost or book value, gets sold for something below that value.
Key Takeaways
- A realized loss is the sale of an asset below the price at which it was acquired.
- This kind of recorded loss is available as a tax write-off for both individuals and businesses.
- Realized losses are different from unrealized losses that only exist on paper.
Understanding Realized Loss
When you buy a capital asset as an investor, any increase or decrease in its value doesn't count as a profit or loss right away. You can only claim that profit or loss after you've sold the security at fair market value in a proper arm's-length transaction.
Real World Example of Realized Loss for Investors
Take this example: suppose you purchase 50 shares of Exwhyzee (XYZ) at $249.50 per share on March 20. From then until April 9, the stock's value drops by about 13.7% to $215.41. But you only have a realized loss if you actually sell at that lower price; otherwise, it's just an unrealized loss on paper.
Realized losses, not unrealized ones, affect your taxes. You can use a realized capital loss to offset capital gains for tax purposes. In the example, after selling your XYZ stocks, you'd realize a loss of 50 x ($249.50 – $215.41) = $1,704.50. Now, say you also made a profit on Aybeecee (ABC), bought at $201.07 and sold at $336.06 in the same tax year.
If you bought and sold 50 ABC shares, your capital gain would be 50 x ($336.06 – $201.07) = $6,749.50. By applying the realized loss from XYZ, you'd only owe taxes on $6,749.50 – $1,704.50 = $5,045, not the full gain amount.
Plus, if your realized losses for the tax year exceed your gains, you can deduct up to $3,000 of the remaining losses from your taxable income. If losses go beyond that $3,000 limit, you can carry the rest forward to future years. This is known as tax-loss harvesting, and discount brokers have added tools to their apps to help with it in recent years.
How Realized Loss Works for Businesses
For businesses, a realized loss occurs when you sell an asset for less than its carrying amount. Even if the asset was listed on the balance sheet at a fair value below cost, the loss isn't realized until the asset is removed from the books—through sale, scrapping, or donation.
One benefit of a realized loss is the tax advantage. In most cases, you can apply part of that loss against a capital gain or realized profit to lower taxes. This can be useful for a company aiming to reduce its tax burden, and sometimes firms will deliberately realize losses on assets when their tax bill looks too high.
Essentially, a business might choose to realize losses on as many assets as possible in periods where it would otherwise pay taxes on profits or capital gains.
Other articles for you
Taxable income is the portion of your gross income subject to taxation after deductions, used to determine your tax liability.
The Social Security Administration is a U.S
Insurtech uses technology to innovate and improve efficiency in the insurance industry.
This text explains the roles and functions of investment banks in facilitating major financial transactions and providing advisory services.
Financial indicators are essential tools for assessing economic health and predicting market trends through economic and technical metrics.
The Heath-Jarrow-Morton Model is a framework for modeling forward interest rates to price interest-rate-sensitive securities.
The average propensity to consume (APC) measures the percentage of income spent on goods and services rather than saved, serving as a key economic indicator.
A return is the gain or loss generated by an investment over time, expressed in dollars or as a percentage.
Zero-proof bookkeeping is a manual method to verify accounting entries by subtracting them to reach a zero balance.
Economic Value Added (EVA) measures a company's true economic profit by subtracting its cost of capital from net operating profit after taxes.