realization of gain

Realization of gain is when an asset is sold at a price higher than its adjusted cost basis. Section 1001 of the Internal Revenue Code states that the gain from the sale of property is the “excess of the amount realized therefrom over the adjusted basis,” and states that “the amount realized from the sale. . . of property shall be the sum of any money received plus the fair market value of the property (other than money) received.” Put more simply, the amount realized from a sale is the money received plus the fair market value of any non-money received, and the realized gain is the amount realized over that property’s adjusted basis. 

For example, imagine an individual purchased land for $1,000 five years ago and exchanged it today for $1,100 cash and another parcel of land with a fair market value of $500. The seller would realize $600 in gain. Note that the realization of gain differs from the recognition of gain. Not all gain realized is recognized—i.e. taxable—because of certain income tax provisions and exemptions.

[Last reviewed in September of 2021 by the Wex Definitions Team]

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