Submitted by: Submitted by bradycurren
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Category: Business and Industry
Date Submitted: 11/03/2015 10:00 AM
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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