What is a Realized Loss?

A realized loss occurs when the sale price of an asset is lower than its carrying amount . This loss is only considered to be realized when the asset is removed from the entity's accounting records . Thus, a loss is only realized when the associated asset has been sold in an arm’s length transaction , donated, or scrapped.

Tax Treatment of a Realized Loss

A realized loss can be included on an entity's tax return as a reduction of taxable income. A business may choose to realize losses on as many assets as possible when it would otherwise have to pay taxes on realized profits or capital gains.

Example of a Realized Loss

An investor pays $500 for several shares of stock. Two years later, he sells the shares for $400. His realized loss is the $100 difference between the purchase price and the sale price of the stock.