What it means
A realised gain is the difference between the net proceeds of a sale and the asset's adjusted cost base, which is the original purchase price plus buying costs and any improvements, less any depreciation already claimed. The word realised simply means the transaction has completed and the cash or the receivable exists.
The distinction between realised and unrealised matters because it usually determines when tax falls due and when profit appears in the accounts. A shareholding that has trebled in value creates no tax liability while it is held, so an owner can influence which year a gain lands in by choosing when to sell.
In the accounts, gains on assets used in the business normally appear on a separate line rather than inside revenue, because they are not part of trading performance. Analysts strip them out when assessing underlying profit, and a company that flatters its results with disposal gains is found out quickly.
Not everything follows the simple rule. Financial instruments held at fair value run their movements through profit or loss each period, so by the time they are sold much of the gain has already been recognised and the realised amount is only the final increment.
Timing is the practical lever. Realising a gain in the same period as a loss allows the two to be offset, and moving a sale a few weeks into a new tax year can change the rate that applies, though the rules on how gains are matched vary by jurisdiction and are worth checking before acting.
In practice
Real-world examples
Example 1
A haulage company sells a depot it no longer needs. The site cost $850,000 twenty years ago and sells for $2,100,000 net of fees, producing a realised gain of $1,250,000 that is presented below operating profit so investors can still see the underlying business.
Example 2
A founder sells 300,000 shares in a secondary transaction at $44 each, against an original cost of $1 a share. The realised gain is 300,000 x $43 = $12,900,000, and she sets the tax aside before spending a dollar of it.
Example 3
An exporter records a customer receivable at $180,000. By the time the payment arrives the exchange rate has moved in its favour and the cash received is $186,500, so the company books a realised foreign exchange gain of $6,500.
Think of it
Imagine you own a rare comic book. A collector tells you it is worth 500 pounds, but it cost you 50 pounds. That 450 pound profit is just a guess until you actually hand the comic to a buyer and take their money.
Formula
Calculation
Realised Gain = Net sale proceeds - Adjusted cost base
where Net sale proceeds = Sale price - Selling costs
and Adjusted cost base = Purchase price + Purchase costs + Improvements - Accumulated depreciation
An investor buys 4,000 shares at $18 each, paying $72,000 plus $200 of commission, so the adjusted cost base is $72,200. Three years later the shares are sold at $31 each for $124,000, with $250 of dealing costs, giving net proceeds of $124,000 - $250 = $123,750. The realised gain is $123,750 - $72,200 = $51,550. If the gain is taxed at 20%, the tax due is $51,550 x 0.20 = $10,310, leaving $41,240 in the investor's hands.Case study
Seen in the real world
Halloway Instruments is a fictional maker of calibration equipment, used here as an illustrative example. Fifteen years ago it bought a building and site for $1,200,000, allocating $300,000 to land and $900,000 to the structure, which it depreciated over 30 years at $30,000 a year. By the time it decided to move, accumulated depreciation stood at $450,000 and the carrying amount of the whole property was $1,200,000 - $450,000 = $750,000.
The site sold for $2,050,000, with $60,000 of agent and legal fees, giving net proceeds of $1,990,000 and a realised gain of $1,990,000 - $750,000 = $1,240,000. Reported profit for the year jumped from $900,000 to $2,140,000, and the share price rose on the announcement.
The correction came at the results presentation. Analysts stripped the disposal out, pointed out that trading profit had actually been flat, and asked what the company intended to do with the proceeds. Halloway's chief executive used the moment to commit the cash to a new production line, which turned a one-off accounting event into something with a future in it.
Watch out
Common mistakes
- Counting a rise in value as profit before anything has been sold. Until the asset changes hands the gain is unrealised, and markets have a habit of taking such gains back.
- Forgetting to add buying and selling costs to the calculation. Commission, legal fees and stamp duties all adjust the cost base or the proceeds, and ignoring them overstates the gain and the tax on it.
- Treating a disposal gain as part of trading performance. It belongs on its own line, because repeating it next year would require selling something else.
Questions
People also ask
Does a realised gain always create a tax charge?
Not always. Reliefs, allowances, offsetting losses and the type of asset all affect the outcome, and some accounts and structures shelter gains entirely.
What is the difference between a realised gain and a capital gain?
A capital gain is the tax term for a gain on a capital asset, and it is normally only assessed once that gain has been realised through a sale.
Can a gain be realised without cash changing hands?
Yes. An asset swap or a sale settled in shares can still realise a gain, because ownership has transferred and the consideration has a measurable value.