Realized and recognized gains and losses, basis determination, capital assets definition

¶ … realized and recognized gain or loss is really in the characterization of reporting taxes. When one sells an asset there may be federal income tax liability if there is a profit, or a deduction if allowed, with a loss. The IRS distinguishes between recognized gains/losses and realized gains/losses. One way to remember the model is that a recognized gain might create a tax liability, but the realized gain will help determine the amount of that liability. Realized gain or loss is the total amount of gains or losses that result from the sale of securities. A realized gain is the excess you receive from adjusted cost basis over the proceeds from the sale; a loss is the monetary value of any loss resulting from a trade. Recognized gains or losses are an income-tax base paradigm.

For tax purposes, a recognized gain considers the difference between the basis of the asset and the sales price. For instance, if you own a share of stock with the basis of $100 and you sell it for $150 you earn a recognized gain of $50. You often must pay capital gains tax on this depending on your income structure. Realized gains refer to the actual amount of money earned in the sale, less any costs. In our above example, if the brokerage and other fees totaled $15, then you would no longer have a gain of $50, but a gain of $35 (Evans, 2012).

Question B - The recipient of a gift does not pay taxes or report income when the gift is received, but the new owner must report any gains or losses. Receipts of gift property have different tax consequences than on inherited property. Gains or losses on property received as a gift are calculated by looking at the original owner's cost basis. So, when the property is given, the recipient receives both the property and the property's cost basis, as well as the holding period to determine the gain as short- or long-term. The basis of gift property is defined as the original owners cost basis plus or minus appropriate adjustments (repairs, improvements, expenses for sales, etc.). These adjustments that reduce basis also include depreciation claimed for rentals, etc. The recipients gain or loss of the gift property will be the selling price less the adjusted cost basis. The adjusted basis is the net cost of the asset after adjustment tax appropriate items (Legal Information Institute, 2012).

Question C- Capital assets have three definitions; one for financial economics, one for accounting systems and one for tax purposes. In fiscal economics, capital assets are any assets used to generate income as opposed to assets used for enjoyment or consumption. This becomes important because of individual tastes. In governmental accounting, capital assets are any asset used in operations with an initial useful life that is greater than one reporting period. In tax law, gains or losses from capital assets are treated differently than other income. Capital assets usually include the assets beyond the daily scope of business operations, like investments or personal assets. Capital assets include all assets except inventory of supplies or properties that might be held for sale, any depreciable property used in a business, accounts or notes receivable, even certain copyrights and commodities. It is important not to confuse capital assets with fixed assets or investments. It should also not be confused with capital (finance) that an institution needs to maintain operation. Further, capital gains and losses are long or short-term based on whether the asset will be held for at least a year. They are reported on Form 8949 resulting in a net capital gain, or the amount in which the net long-term gain for the year totals. Losses are claimed a $1,500 for the individual, or if more, can be forwarded to future years (IRS 409, 2013; National Timer Tax, 2012).

Question D - Stock in corporations is usually considered to be a capital asset in the hands of individual shareholders. Gains or losses, exchange or worthlessness are then treated as capital assets. A worthless stock is one that has a market value of zero. The challenge is that before deducting securities at a loss, they must be sold, and worthless securities are unsalable. If the stock becomes worthless during the year of taxation, the holder can claim the loss as a deduction (usually a capital loss). The loss cannot exceed $50,000 for a single filer.