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.

Contact The McGuire Law Firm and schedule your free consultation with a tax attorney.  The McGuire Law Firm has law offices in Golden, Colorado and Denver, Colorado for your convenience!

The sale of a capital assets results in a capital gain or a capital loss.  A capital asset could be defined as property you use for investment purposes and sometimes personal purposes.  For example, if you purchased Microsoft stock, this stock would be a capital asset and the sale of the stock would result in a capital loss or capital gain.  A capital asset also could include your house, car or other property.

Whether you have a capital gain or capital loss depends upon your basis in the property and what you receive when the property is sold or transferred.  For example, if you purchased stock for $50, your basis in the stock would be $50.  If you sold the stock for $75, you would have a capital gain or $25.  If you sold the stock for $25, you would have a capital loss of $25 ($25).  Whether or not the gain is long term or short term depends upon how long you held the property.

All capital gains will be included in your income.  Beginning in 2013, there is an additional 3.8% tax on Net Investment Income to certain investment income for individuals, estates and trusts that have income above certain thresholds.

Capital losses on the sale of investment property can be deducted, but losses on the sale of personal property cannot be deducted.

If you hold the property for more than a year, the gain or loss is considered long term.  If you hold the property for one year or less, the gain or loss is considered short term.

When long term capital gains are more than your long term capital losses, the difference is net long term capital gain.  If you have more net long term capital gain than net short term capital loss, you have a net capital gain.

The tax rates that apply will depend upon your income and whether the gain was short or long term.  In 2013, the maximum net capital gain tax increased from 15% to 20% for certain individuals with income above a certain threshold.  25% and 28% rates may also apply.

If your losses are greater than gains, you can deduct a loss on your tax return.  The loss is limited to $3000 per year.  If your loss is more than you can deduct in the current tax year, you can carry the loss forward to deduct in later years.

You will report your capital gains and losses on Schedule D and you must file Form 8949 with your tax return to report the gains and losses.

If you have questions regarding capital assets, a Denver tax attorney at The McGuire Law Firm can assist you with these questions and other tax issues.

Schedule a free consultation with a Denver tax attorney by contacting The McGuire Law Firm.  Law offices in Denver and Golden Colorado.