Realized Loss
A realized loss is the loss that is recognized when assets are sold for a price lower than the original purchase price. Realized loss occurs when an asset that was purchased at a level referred to as cost or book value is then disbursed for a value below its book value.
Definition: A realized loss occurs when an asset is sold for a price lower than its original purchase price. In other words, when you sell an asset for less than its cost or book value, a realized loss is incurred.
Origin: The concept of realized loss originates from accounting and finance, used to measure the actual loss an investor incurs when selling an asset. This concept helps investors and companies accurately record and report their financial status.
Categories and Characteristics: Realized losses can be categorized as follows:
- Stock Realized Loss: Loss incurred when an investor sells stocks for less than the purchase price.
- Bond Realized Loss: Loss incurred when bonds are sold for less than their purchase price or face value.
- Real Estate Realized Loss: Loss incurred when real estate is sold for less than the purchase price.
Specific Cases:
- Case 1: Suppose you bought 100 shares of a company at $100 per share in 2022, with a total cost of $10,000. In 2024, you sold these shares at $80 per share, with total proceeds of $8,000. Therefore, your realized loss is $2,000 ($10,000 - $8,000).
- Case 2: A company purchased a commercial property for $500,000 in 2019. Due to a market downturn, the company sold the property for $450,000 in 2024, resulting in a realized loss of $50,000.
Common Questions:
- Q: What is the difference between realized loss and unrealized loss?
A: A realized loss is recognized when the asset is actually sold, whereas an unrealized loss refers to a decline in the market value of an asset that is still being held, not yet confirmed by a sale. - Q: How does a realized loss affect my taxes?
A: Realized losses can be used to offset realized capital gains, thereby reducing taxable income. In some cases, unused losses can be carried forward to future years.
