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When Must I Realize Gain?
Generally, it is easy to understand when gain or loss has been realized, but sometimes it may be hard to ascertain. The article below has been prepared by a Denver tax attorney and business attorney to discuss gain or loss on specific property transactions and certain realization events.
Please remember this article is for informational purposes, and particular facts and circumstances should be discussed with your tax attorney and other tax advisors.
Asset Sale Realization Events
When an asset is sold, disposed of, or transferred, it may go without saying that a realization event has occurred.
Gain on the sale or disposition of the asset will be the amount received (realized) more than the adjusted basis of the property. On the other hand, the loss would be the amount the adjusted basis exceeded the amount realized.
It is important to remember that not all transactions would require one to recognize the gain or loss in their income at the time of the transaction. The word recognition in the previous sentence would mean to include the gain or loss in your current income.
It’s a requirement to include gain or loss on your income in the occurrence of some realization event. Once a realization event has occurred, then you must ascertain and determine the proper tax treatment of the transaction, such as:
- The adjusted basis in the property that was sold, transferred, or disposed of;
- The amount realized from the transaction as a whole;
- Was gain or loss recognized from the transaction;
- The character of the gain. For example, was the gain short-term capital gain or long-term capital gain? Or is the gain subject to recapture rules?
- The loss was allowed in whole or part if there was a loss.
Property Transaction and Value
In regards to a realization event, generally speaking, a transaction with property will be considered a realization event if the taxpayer’s relationship or control of the property is terminated or the interest is significantly or materially reduced. The lack of any transaction would tend to show a lack of a realization event.
Further, it should be noted that the mere increase or decrease in the property’s fair market value does not create a realization event. For example, you may purchase Microsoft stock. As the stock increase, you do not recognize the gain, but rather, when you sell the stock, if the sale price of the stock is more than your adjusted basis, the gain would likely be realized and need to be recognized by reporting the gain on your income tax return.
Furthermore, transferring or disposing property through a gift is generally not a realization event. While the gift may have many tax implications, the gift alone may not be enough for a realization event whereby income or loss would be recognized on an income tax return.
There are multiple issues relating to realizing gain and loss and recognizing profit and loss. Further, there are many situations whereby a loss may be disallowed in whole or part, or the loss can only be realized in specific amounts or over certain times.
Contact Us
John McGuire has prepared this article at The McGuire Law Firm. John is a tax attorney and a Denver business attorney working with individuals and businesses before the IRS and assisting clients with other tax and business matters. John can be reached at 720-833-7705.
