The Ins and Outs of Realized vs. Recognized Gains

May 16, 20237 min read
The Ins and Outs of Realized vs. Recognized Gains
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Key Takeaways

  • A realized gain occurs when an asset is sold at a price higher than the initial purchase price, also known as its book value.
  • The tax treatment of a recognized gain depends on factors such as the amount of the gain, and the tax rate and year.
  • The chief difference between realized and recognized gains is that recognized gain is typically the taxable part of a realized gain.

There are many terms with which potential and new investors should become familiar. Key among them are the financial concepts “realized gains” and “recognized gains.” After all, these types of capital gains, while similar, have distinct differences that can, among other things, inform investment strategies. With that said, here are the ins and outs of realized versus recognized gains.

Realized, Recognized, and Unrealized Gains Defined

Realized Gain

Essentially, a realized gain occurs when an asset is sold at a price higher than the initial purchase price, also known as its book value. It is the total value of one’s profit minus any 

For example, say an investor buys several shares of stock for $1,000. He then sells the shares for $1,200. This investor’s realized gain is $200 – the difference between the stock’s purchase price and the stock’s sale price.

Recognized Gain

A recognized gain is generally the amount of a realized gain that is taxable. For example, perhaps an investor has a realized gain of $975,000 but uses a partial 1031 exchange to defer an $800,000 portion of the gain. The $175,000 difference would be a recognized gain on which capital gains taxes must be paid in the year of the sale.

The tax treatment of a recognized gain depends on factors such as the amount of the gain, and the tax rate and year.

Unrealized Gain

Unrealized gain refers to an increase in an asset’s value that has yet to be sold for cash. The gain is deemed unrealized because it exists solely on paper. An example would be if an investor bought 100 shares for $10 each and the price-per-share increased to $15, the unrealized gain would be $500 (100 x $5 profit).

Realized vs. Recognized Gain

Not knowing the difference between realized gain and recognized gain can significantly affect one’s bottom line. 

The two are similar in that they both have to do with how much gain an investor makes from selling a stock share or other asset – they are both types of capital gains. The chief difference is that recognized gain is typically the taxable part of a realized gain. There are other differences as well:

  • How they are calculated. Calculating recognized gain calls for subtracting the initial cost from the asset’s selling price. Realized gain, however, is the total profit value after subtracting any associated costs, and the initial cost from the profit made from the sale.
  • Taxable values. There are differences here, too, depending on asset types, costs, and IRS regulations, if companies are involved. Examples of recognized gains companies are at times able to exclude from taxable assets include real estate and interest, because those fall under IRS guidelines. With realized gains, costs associated with an asset’s sale may be tax deductible.
  • Profit values. Note that businesses do not account for costs and expenses associated with earnings from selling assets with recognized gains, rendering the recognized gain earned from selling an asset its revenue – not total profit. On the other hand, with a realized gain, the profit is the value after subtracting taxes and fees and the like. 

Realized and Recognized Gains Examples

Realized Gains

Say a club purchases 100 stock shares on Jan. 2 for $1,000 in addition to a $35 commission. So, the cost basis is $1,035. The following day, the treasurer sells the shares for $12 each and makes $35 on the sale for a realized gain of $135.

In another example, Jon bought a wrecked Ferrari GT in California 62 years ago for $90,000 and invested $350,000 to refurbish the vehicle to stock condition, Another $60,000 went to environmental clearance and vehicle documentation, bringing the investment to $500,000. Jon then got offers for the overhauled car starting at $2 million. He ultimately sold the Ferrari to Thomas for $2.5 million, realizing a gain of $2 million.

Recognized Gains   

If one purchases a house from $500,000 and a year later sells it for $600,000, the recognized gain comes to $100,000. Such a recognized gain will likely be eligible for capital gains treatment, markedly reducing the income tax rate paid.

In another example, say a share of stock has a basis of $25 and it is sold for $35, the recognized gain is $10. The sale of securities is commonly subject to capital gains taxes.

The Tax Implications of Realized and Recognized Gain

Realized long-term capital gains – gains on investments owned for longer than a year, are subject to a 0%, 15%, or 20% tax rate, depending on one’s tax bracket.

On the other hand, a recognized gain’s taxable value is generally the difference between the basis and the sale price. There are times when recognized gains may not be taxable – or are deferred – if a company does not recognize gains at sale time.

Accounting Standards

Generally Accepted Accounting Principles is the SEC-adopted accounting standard, and International Financial Reporting Standards govern how certain transaction types and events – including realized and recognized gains — should be reported in financial statements.

In general, realized gains are listed on a company’s income statement and refers to profits from completed transactions.

By contrast, revenues are generally recognized when earned – not always when received. There are situations, though, in which revenues are both earned and received simultaneously, such as when a customer makes a retail purchase in a store.

Accounting principles required organizations to adjust their financial statement to show the fair market value of gains and losses that are unrealized.

Impact on Investment Strategies

Understanding the concepts of realized and recognized gains can inform investment strategies, since misunderstanding them can negatively affect an investor’s bottom line. Different market conditions, though, can affect realized and recognized gains. For example, budgeting for realized gains must be adjusted based on market conditions, particularly during times of market volatility.

Understanding the distinction between realized and recognized gains is especially key for day traders and those who trade in the market online.

Legal and Regulatory Considerations

There are laws and regulations that affect when gains are realized or recognized. For example, under the IRS code, certain assets are ineligible for capital gains tax treatment, including business inventory, depreciable business property, real estate used by a business or as rental property, literary or artistic compositions, and copyrights, patents, and inventions.

Financial Reporting

Realized gains are reported on a company’s financial statement during the period in which the asset sale occurs. Such gains for individual securities are reported to the investor and the Internal Revenue Service on Form 1099-B. Investors must file an IRS Schedule D if there are gains (or losses) from investments.

The IRS deems a recognized gain as a profit that is earned from an asset sale. Such a gain considers the difference between the asset’s original price and its sale price and must be reported accordingly. 

Impact on Financial Ratios

Realized and recognized gains can impact key financial ratios – a relative magnitude of two chosen numerical values extracted from a business’s financial statements. Depending largely on the size of such gains, and the ratio type, such ratios can reveal meaningful information about a company.

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Capital Gains and Alternative Investments

There also are tax benefits to investing in alternatives – assets other than stocks and bonds –such as art and real estate. As longer-term alternative investments, these assets can hedge against short-term capital gains taxes.

Not only do such assets reduce portfolio volatility, by the way, but they have the added benefit of diversifying holdings – spreading investments among as well as within varied asset classes. Diversification is a cornerstone of long-term successful investing. 

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $5000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


It is important for investors to understand realized and recognized gains, their differences, and similarities, how they affect taxation and financial reporting, and their impact on investment strategies — including alternative investments.