When must I realize gain? For the most part, it is easy to recognize when gain or loss has been realized, but at other times it may be hard to ascertain. The article below has been prepared by a tax attorney to discuss gain or loss on certain property transaction and certain realization events. Please remember this article is for informational purposes and specific facts and circumstances should be discussed specifically with your tax attorney and other tax advisors.
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) in excess of the adjusted basis of the property. Loss, on the other hand 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 recognize in the previous sentence would mean to include the gain or loss in your current income. A requirement to include gain or loss in your income is 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 perhaps, is the gain subject to recapture rules.
- If there was a loss, is the loss allowed in whole or in part.
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 fair market value of property does not, by its self, create a realization event. For example, you may purchase Microsoft stock. As the stock increase, you do not recognize gain, but rather, when you sell the stock, if the sale price of the stock is in excess of your adjusted basis, gain would likely be realized, and need to be recognized by reporting the gain on your income tax return. Furthermore, transferring or disposing of 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 to consider relating to realizing gain and loss, and recognizing gain and loss. Further, there are many situations whereby a loss may be disallowed in whole or part, or the loss can only be recognized in certain amounts or over certain times.
This article has been prepared by John McGuire at The McGuire Law Firm. John is a tax attorney and 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.