## What is Realized Gain?

Realized gain is a gain earned by selling an asset at a price higher than the original purchase price. When an asset is sold at a higher price than its original purchase price, a realized gain is achieved, which increases the current assets. This gain is taxable since the seller benefits out of the transaction, whereas an is not taxable since it is valued at the fair market value. Only when the asset has been sold, the gain is realized until then it is unrealized.

### Components of Realized Gain

The below illustration best explains the difference between Unrealized and Realized gain/loss.

When a stock is bought, the trade is entered into, and a new trade is started. During the trade, the value of the stock can go up or down depending on the market conditions. If the value of the stock goes up, it is called as 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 holder of the stock is not making an actual profit or loss. An unrealized gain/loss is a state in which the trade is still ‘in progress’ and is not the final state unless the holder of the stock sells it. When the holder of stock decides to sell it at a higher rate than what it was bought for, trade comes to an end.

The stock sold at a higher value is realized gain since the holder of stock has ended trade and made money out of the trade. If the value of the stock had been lower than the value at which it was bought, it would have been a realized loss.

For eg:
Source: Realized Gain (wallstreetmojo.com)

### Realized Gain Formula

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:

Realized Gain Formula = Selling Price of Asset/Stock – Original Purchase Price of Asset/Stock

For eg:
Source: Realized Gain (wallstreetmojo.com)

### Examples

Below are examples to understand this gain better.

#### Example #1 – Stock

You bought shares worth \$1,000 of ABC Inc. A year later, the market makes an upward move, 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 here is \$500 since the shares have been sold, and there has been appreciation in the share value.

#### Example #2 – Asset

James, an avid car enthusiast, bought a scrapped Ferrari 250 GT California 1961 at a value of \$90,000. He refurbished the car to its stock condition by investing an extra \$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. There was another offer from Andrew, which was at \$2,500,000, and James sells 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. At the time of the quote for the car, which was at \$2,000,000, James had an unrealized gain. But as soon as he sold the car at \$2,500,000, he had a realized gain.

• When the price of the asset increases, the realized gain increases if the asset is sold.
• If another asset or stock that is underperforming, the loss can be covered with the gain earned by the realized gain.
• They are profits and hence need to be reflected in the book of accounts, which would eventually result in higher profit levels for an organization.

• It is an income and hence attracts tax on the income generated.
• The higher the realized gain higher is the applicable tax.
• Once the transaction is ended by selling the stock/asset, the realized gain is achieved; however, it might have been higher if the price would have gone higher depending on the market conditions.

### Important Points

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

### Conclusion

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