Alternate name: Capital gains, realized income
For example, say you paid $200 for 10 shares of a company, then those shares rise in value from $20 per share to $30 per share. You then sell your stock for a total of $300. In this case, your realized gain would be $100 ($300 − $200 = $100).
How Realized Profit Works
Realized profit is a simple but important concept in investing. It’s the money you earn and keep, after expenses, from an investment. For most investors, realized profit is the ultimate goal of investing. Until you sell and see the profit in your brokerage or bank account, the gain could be lost. Once it is recognized and recorded in the books, unrealized profit becomes realized profit. Here’s a detailed example to show you how realized profit works. Let’s say you bought shares of ABC Company for $1,000. After holding the stock for 10 years, you sold all of those shares for $2,500. The purchase was commission-free, but the sale had a $5 fee. To calculate your realized profit, you can use this formula: Realized Profit = Sale Proceeds - Fees - Purchase Price In this example: Realized Profit = $2,500 - $5 - $1,000 Realized Profit = $1,495 In the U.S., realized profits are often treated as capital gains for tax purposes. That means you must pay taxes on the profit you earn from investing. Short-term gains on investments held for one year or less are taxed as ordinary income, while long-term gains are usually taxed at a lower rate—no more than 15% for most people. You can report capital gains to the IRS on Tax Form 8949.
Realized Profit vs. Unrealized Profit
Realized profit is similar but not the same as unrealized profit. Here’s a side-by-side comparison. Once an investment is sold, there is no more opportunity for investment gains, and the investment may be taxable. Conversely, before you sell, the value of an investment may still change, and any profit or loss is unrealized. Depending on your investment goals and strategy, it may be best to sell an investment and recognize the gain, or it may be better to keep holding it. Every investor and investment is unique. Take the time to understand your investments and when it makes sense to turn paper profit into a realized gain.
