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Differences Between Investment Realized Gain/Loss and Actual Returns

Edward Goldstein, CFP |
Categories
Investments

As we enter another tax season, I wanted to give everyone a refresher on how Realized Gain/Loss (RGL) reported on a Year-End Brokerage 1099-Misc differs significantly from the same account’s actual performance.  The key missing accompanying component is Unrealized Gains/Losses (UGL).

Below is a brief overview of each:

  1. Realized Gains/Losses (RGL):
    • Definition: Realized gains or losses occur when you sell an investment.  It’s the moment when theory transforms into tangible results.
    • Example: Imagine you purchased shares of XYZ Corp. at $50 per share. If you later sell them for $60 each, you’ve realized a gain of $10 per share. This gain is now part of your financial reality.
    • Tax Implications: The realized gains/losses reported on your year-end Brokerage 1099-Misc report directly impacts your tax liability.  When you profit from selling an investment, it becomes a taxable event.  Since the IRS takes notice, and it affects your annual tax return.
    • Tax Implications: It is also essential to understand that RGL is separate from the dividends and interest earned within the account.
    • Tax Implications: While the IRS imposes a $3,000 limit on deductible net realized losses, all excess amounts are carried forward for future use.

 

  1. Unrealized Gains/Losses (UGL):
    • Definition: Unrealized gains or losses exist on paper until you decide to sell the investment.  
    • Scenario: Suppose you hold ABC stock, which has experienced fluctuations in value since your initial purchase. The difference between the current market value and the original purchase price represents an unrealized gain or loss.
    • Tax Implications: Unlike realized gains/losses, UGL doesn’t immediately affect your taxes.  It’s a theoretical concept that the IRS does not consider until you take action by selling the investment.

Comparison Chart

Aspect

RGL

UGL

Tax Impact

Directly impacts taxes

Doesn't impact taxes until realized

Reporting Frequency

Annually on the 1099 form

Constantly changing with market shifts

 

I hope this helps provides any needed clarity on a sometimes confusing topic. If you have any questions, please don’t hesitate to reach out to me at Financial Life Planning through the “Click for free consultation” button.

Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner 
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ  08053
Phone: 856-988-5480
Fax: 908-292-1040