Realized Profit (Realized Loss)

Definition of Realized Profit (Loss)

A Realized Profit (Loss) is mainly defined as the capital gain or loss which the business is likely to produce in the entire year. It is completely different from the paper profits or daily profits. Daily profit which is also known as paper profit in common parlance is the amount which a company or a business gains daily after subtracting the amount invested in business. But the Realized Profit (Loss) is the loss or gain at the end of the year. It is a taxable income of the business making it so vastly different from the paper profits.

An illustration helping to understand Realized Profit (Loss) in a better way

The realized profit (loss) can be explained very easily with the help of an example. Suppose you bought a share worth $500 from the stock market and the value of the share jumps to $600 then you have a paper profit of $100. It is a paper profit because it is only visible in a paper and it is not converted to cash yet. If you sell away the share for $600 then you get a cash of $100 as a profit and it becomes your realized profit. The income then becomes taxable.

Similarly, if you buy a stock for $500 and the value drops to $400, then you make a paper loss of $100 which is also in black and white. If you do not sell away your stock you are not making the actual loss from the share. However, if you sell away the share you face the actual loss or the so called realized loss which you might use as an offset in your tax bill.

Realized Profit (Loss) is generally associated with a complete transaction and it is not dependent on the rise and fall of a products value. In order to understand the conception of the realized profit in a better way you need to understand the conception of Unrealized Profit (Loss). An unrealized profit or loss is associated with the change in value of a particular product or stock according to the market value. It is not dependent on whether you made the transaction properly or not. So in other words unrealized profit and paper profit is the same thing. Only the slight difference is the term unrealized profit or loss is a more technical term than the latter. So the Realized Profit (Loss) can be called the actual profit or loss in business.