What it means
A realised loss is the amount by which the net proceeds of a sale fall short of the asset's carrying amount or adjusted cost base. It applies to shares, bonds, property, equipment and even foreign currency balances settled at a worse rate than the one originally recorded.
The realised and unrealised distinction is the whole point of the term. Holding a losing investment keeps the loss off the tax return and, for many asset classes, out of the reported profit line, which makes the decision to sell as much an accounting and tax question as an investment one.
Losses do have a use. Most tax systems allow a realised capital loss to be offset against realised capital gains in the same period, with any unused amount carried forward, so selling a poor holding in a year when a large gain has been banked can reduce the total bill.
There is a limit on how far that can be pushed. Rules such as wash sale or bed and breakfast restrictions deny the loss if the same or a very similar asset is bought back within a short window, commonly around 30 days, so selling purely for the tax effect and buying straight back does not work.
A realised loss should not be confused with an impairment. An impairment writes down the carrying amount of an asset the business still owns because its recoverable value has fallen, whereas a realised loss only crystallises when ownership actually changes hands.
In practice
Real-world examples
Example 1
An investor sells a holding that cost $60,000 for $38,000, realising a loss of $22,000. Because she had already banked a $35,000 gain earlier in the year, the loss reduces her taxable gain to $13,000.
Example 2
A fashion retailer clears last season's coats, which cost $240,000, for $95,000 through an outlet. The $145,000 difference is realised on sale, though part of it had already been anticipated through an earlier write-down to net realisable value.
Example 3
A machinery importer records a supplier liability at $410,000. By settlement day the currency has moved against it and the payment costs $437,000, producing a realised exchange loss of $27,000 that the treasurer flags as the price of leaving the exposure unhedged.
Think of it
Imagine buying a collectible football card for 50 pounds. If experts say it is only worth 20 pounds today, you have an unrealised loss. But if you actually sell it to a collector for 20 pounds, you have a realized loss.
Formula
Calculation
Realised Loss = Adjusted cost base or carrying amount - Net sale proceeds
A printing business bought a press for $180,000 six years ago and has charged $110,000 of depreciation against it, leaving a carrying amount of $180,000 - $110,000 = $70,000. It sells the press for $48,000 and pays $2,000 to have it removed from the floor, so net proceeds are $48,000 - $2,000 = $46,000. The realised loss is $70,000 - $46,000 = $24,000. At a 25% tax rate that loss reduces taxable profit by $24,000 and the tax bill by $24,000 x 0.25 = $6,000, so the after-tax cost of the disposal is $24,000 - $6,000 = $18,000.Case study
Seen in the real world
Silverbrook Holdings is a fictional family investment company, presented here as an illustrative example. It held a stake bought for $2,400,000 that had fallen to $1,500,000, an unrealised loss of $900,000 that the family had been reluctant to crystallise because selling felt like admitting a mistake.
That same year Silverbrook sold a commercial property and realised a gain of $1,100,000. Its adviser pointed out that selling the loss-making stake would reduce the net taxable gain to $1,100,000 - $900,000 = $200,000. At a 25% rate, tax would fall from $275,000 to $50,000, a saving of $225,000, while the economic loss on the stake had already happened whether or not it was recorded.
The complication was that the family still wanted exposure to the sector. Buying the same holding back within 30 days would have denied the loss under the anti-avoidance rules, so Silverbrook bought a broad sector fund instead, held it through the window, and only then reconsidered the original position. The lesson the family drew was that a loss left unrealised is not a smaller loss, only a less useful one.
Watch out
Common mistakes
- Believing a loss is not real until it is sold. The economic value has already gone, and refusing to sell only means the loss cannot be offset against anything.
- Selling and immediately repurchasing the same asset to bank a loss. Wash sale and similar rules disallow the loss when a substantially identical asset is bought back inside the specified window.
- Confusing a realised loss with an impairment charge. One follows a disposal, the other is a revaluation of something still owned, and the tax treatment of the two is usually different.
Questions
People also ask
Can a realised loss be offset against ordinary trading profit?
It depends on the asset and the jurisdiction. Capital losses are frequently restricted to offsetting capital gains, while a loss on equipment used in the business often reduces trading profit directly.
What happens to a loss that cannot be used this year?
In most systems it is carried forward and set against future gains, sometimes indefinitely, though the rules on how and against what vary widely.
Does selling at a loss always reduce tax?
No. If there are no gains to offset and no carry-forward available, the loss provides no immediate benefit, so the tax effect should never be the sole reason to sell.