Realized Loss

Realized Loss Vs. Recognized Loss

by David Rodeck, Demand Media

When you sell an asset for a loss, you must be careful to distinguish a

realized loss from a recognized loss for your taxes. A loss is realized

immediately after you complete a transaction but has no impact on your

taxes. Only recognized losses can be deducted from your taxes. A likekind exchange is a common transaction that can create realized and

recognized losses at different times.

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Capital Loss

A capital loss occurs when you sell a capital asset for less than its basis.

The basis of an asset is its purchase price plus the cost of any

improvements or additions. Capital losses can be used to reduce the tax

on gains from other asset sales. If your losses exceed your gains for the

year, you can reduce your income by up to $3,000 a year from capital

losses. Any unused losses can be carried forward to be used toward future

tax returns.

Realized vs. Recognized

A loss is realized immediately after you sell an asset for a loss. A loss is

recognized when the loss may be applied against your taxes. Most sales

create a realized and recognized loss at the same time, immediately after the sale. The IRS delays the tax impact of

certain transactions. These transactions are specifically listed in the tax code. If a sale has a delayed tax impact, it will

create a realized loss but not a recognized loss. The loss will only be recognized when the tax impact is recognized by the

IRS.

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