Realized Unrealized Profit/Loss
Updated on July 18, 2023
Realized profit or loss refers to the actual gains or losses that have been generated from completed transactions or investments where the profits or losses have been realized through a sale or disposal of the asset. It is calculated by subtracting the cost or basis of the investment from the proceeds obtained from the sale or disposal of the asset. Realized profit or loss is recognized in the financial statements during the period in which the transaction or sale takes place and directly impacting the net income or earnings post-taxation of an individual or organization.
If the realized profit or loss arises from the sale of capital assets such as property, stocks, or mutual funds, it is categorized as capital gains. Capital gains can be either short-term (held for less than 36 months) or long-term (held for 36 months or more), and they are subject to specific tax rates and exemptions based on the nature of the asset and the holding period. If the realized profit or loss is generated from a business or profession, it is treated as business income and taxed accordingly.
What is Unrealised Profit / Loss
Unrealized profit or loss represents the potential gains or losses that exist on an investment or asset that has not yet been sold or disposed of. It is a notional or a paper gain or loss that has not been realized through a transaction. Unrealized profit or loss arises when the market value of an investment or asset fluctuates and is calculated by determining the difference between the current market value of the investment or asset and its original cost or basis.it is not reported in the books of accounts and therefore does not have an impact on net income or taxation.
Unrealized profit or loss is generally not subject to immediate taxation as it represents a paper gain or loss that has not been realized through a transaction. However, few exceptions to this rule include the conversion of stock-in-trade or mark-to-market trades, deemed transfer provisions as per the Income Tax Act, etc.