What Is a Realized Gain?

If you've ever heard the investing expression "it's not a profit until you sell," it refers to the important concept of realized versus unrealized investment gains. In this article, we'll define what a realized gain is, why it's important to know, and what it can mean to you.

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Bag of money and hourglass illustrate growing investment. — Image source: Getty Images.

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Federal Income Tax

The federal income tax is the primary source of revenue for the United States government.

There are some exceptions to taxable capital gains. Perhaps the largest is the exemption for primary residences. In simple terms, if you sell your primary home at a profit, you may be able to exclude as much as $250,000 in realized gains from your taxable income or as much as $500,000 if you're married and filing jointly.

Finally, there's an exemption for investments held within retirement accounts such as an IRA. Even if you sell an investment within a retirement account at a massive profit, you won't have to pay any capital gains tax on the sale. If you have a tax-deferred retirement account like a traditional IRA, you only pay tax when you withdraw money from the account. If you have a retirement account funded with after-tax dollars like a Roth IRA, qualifying withdrawals are 100% tax-free, regardless of how much your realized investment gains are.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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