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Simple English definitions for legal terms
Realization of gain
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A quick definition of Realization of gain:
Realization of gain: When you sell something for more money than you paid for it, that's called a realization of gain. The amount of gain is the difference between what you sold it for and what you paid for it. For example, if you bought a toy for $5 and sold it for $10, you realized a gain of $5. However, not all gains are taxable, which means you don't have to pay taxes on them.
A more thorough explanation:
Realization of gain occurs when an asset is sold for a price higher than its adjusted cost basis. This means that the seller has made a profit on the sale of the asset.
According to Section 1001 of the Internal Revenue Code, the gain from the sale of property is calculated as the "excess of the amount realized therefrom over the adjusted basis." This means that the amount realized from the sale is the sum of any money received plus the fair market value of any non-money received. The realized gain is then calculated as the amount realized over the property's adjusted basis.
For example, if an individual purchased land for $1,000 five years ago and sold it today for $1,100 cash and another parcel of land with a fair market value of $500, the seller would realize a gain of $600. This is because the amount realized from the sale is $1,600 ($1,100 cash + $500 fair market value of the other parcel of land), and the adjusted basis of the land was $1,000.
It's important to note that the realization of gain is different from the recognition of gain. Not all gain realized is taxable due to certain income tax provisions and exemptions.