## DEFINITION of '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 which was purchased at a level referred to as cost or book value is then disbursed for a value below its book value.

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## Realized Loss for Investors

When an investor buys a capital asset, an increase (or decrease) in the value of the security does not translate to a profit (or loss). The investor can only make claim to a profit or loss after he has sold the security at fair market value in an arm’s length transaction. For example, assume an investor purchases 50 shares of Nvidia (NVDA) @ \$249.50 per share on March 20, 2018. From this purchase date to April 9, 2018, the value of the stock declined about 13.7% to \$215.41. However, the investor only has a realized loss if he actually sells at the depressed price. Otherwise, the decline in value is simply an unrealized loss which only exists on paper.

Realized losses, unlike unrealized losses, can affect the amount of taxes owed. A realized capital loss can be used to offset capital gains for tax purposes. From our example above, the investor, after selling his NVDA stocks, realized a loss of 50 x (\$249.50 - \$215.41) = \$1,704.50. Suppose he realized a profit on Netflix (NFLX) which he purchased for \$201.07 and sold for \$336.06 during the same tax year. If he purchased and sold 50 NFLX shares, his capital gain on the transaction will be recognized as 50 x (\$336.06 - \$201.07) = \$6,749.50. Applying the realized loss to this gain, means that the investor will only owe taxes on \$6,749.50 - \$1,704.50 = \$5,045, rather than the entire capital gain amount.

In addition, if the realized losses for a given tax year exceed the realized gains, up to \$3,000 of the remaining losses can be deducted from the taxpayer’s taxable income. Also, if net losses exceed the given \$3,000 limit, the remainder can be carried forward to future years.

A realized loss occurs when the sale price of an asset is lower than its carrying amount. Although the asset may have been held on the balance sheet at a fair value level below cost, the loss only becomes realized once the asset is off the books. An asset is removed from the books when it is sold, scrapped, or donated by the company.

One upside to a realized loss is the possible tax advantage. In most instances, a portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. This may be quite desirable for a company looking to limit its tax burden, and firms may actually go out of their way to realize losses in periods where their tax bill is expected to be higher than wished. In effect, a business may choose to realize losses on as many assets as possible when it would otherwise have to pay taxes on realized profits or capital gains.

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