What Is a Recognized Gain?

A recognized gain is when an investment or asset is sold for an amount that is greater than what was originally paid. Recognizing gains on an asset will trigger a capital gains situation, but only if the asset is deemed to be capital in nature. 

The amount of any capital gain will need to be reported for income tax purposes and is measured by the selling price minus the purchase price.

Key Takeaways

  • A recognized gain is the profit you make from selling an asset.
  • Recognized gains are different from realized gains, which refers to the amount of money you made from the sale.
  • Recognized gains are determined by the basis, which is the price you purchased the asset at. Your gain is the money you made from the sale minus the basis price.

Understanding a Recognized Gain

Recognizing gains on an asset simply means that the business or individual made money on selling a piece of property or an investment. Depending on the nature of the asset and the tax laws of the jurisdiction, the gain on the sale may or may not be taxable.

Ways Recognized Gains Are Handled by the IRS

The taxable portion of the recognized gain is the difference between the base price of the asset and the sale price. That profit may be subject to taxation. It is possible for exceptions to such taxation to exist.

There are instances, due to tax provisions, where the seller of an asset or investment might not have to pay taxes due to the fact that the gain was not recognized at the time of the sale. Under such circumstances, the Internal Revenue Service may decide to allow such exceptions. Recognized gains could be deferred until a later date or might be entirely excluded.

Real World Example of a Recognized Gain

Certain assets allow for such exclusions. For example, the sale of a primary residence might not be taxed as a recognized gain if the profit from that sale falls within the guidelines set by the IRS. That threshold can differ between single tax filers and married filers. For instance, in prior years, the IRS allowed single filers to net up to $250,000 in profits tax-free on the sale of a primary residence while married filers were allowed to net $500,000 on such a sale. The upper limit for this tax break may vary by year.

Interest from a property can sometimes be classified in this category. In some circumstances, the sum realized from the sale of a life interest in a property, the income interest in a trust, and the interest from a property over a number of years can all be regarded as a recognized gain. Receiving such interest as a gift, transfer from a spouse, or inheritance means the amount realized would qualify as a recognized gain. So if a family member leaves real estate to an individual and their sibling, and the individual, in turn, sells his or her life interest in the property, the proceeds would qualify as the recognized gain.