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Realized and Unrealized Gain

What's the difference between realized gain and unrealized gain?

Realized and unrealized gains (and/or loss) are two classifications of capital gain. Members must pay income tax on realized gain, but not on unrealized gain.

  • Realized gain is capital gain received as cash on an investment. The investment can be the sale of a security, dividends and interest on securities or cash accounts received in the form of cash, or miscellaneous income that accrues to the club.

    Realized gains appear on the Distribution of Earnings Statement, the Withdrawal Earnings Report, the Income and Expense Statement, and the Balance Sheet. These gains are not shown under the heading of "Realized gain". They appear under such headings as Dividends, Taxable Interest, Capital Gains, Miscellaneous Income, etc.

    Some accounts and investments are tax free, so the members do not pay tax on these gains.
  • Unrealized gain is capital gain on an investment for which the club has not yet received cash. Sometimes unrealized gain is referred to as "paper profits". Unrealized gain is the increased value of a security still owned by the club.

    Distributed unrealized gains are shown on the Complete Journal Listing, the Withdrawal Distribution Report, and the Balance Sheet.

When a member withdraws from the club and his or her units are worth more than his or her investment in the club (i.e., his or her cost basis), the difference that is paid to the withdrawing member is recorded in the Complete Journal as "Unrealized Gains Disbursed". These unrealized gains are the portion of the club's total unrealized gains disbursed, which are carried on the books until the club closes out.

Example 1: Realized gain

The club buys 100 shares of a stock on January 3 for $1000 plus a $35 commission. This makes a cost basis of $1035. On July 3, the treasurer sells the shares for $12 per share plus a $35 commission on the sale. This creates a realized gain of $135.

($1200-$35) - ($1000+35) = $130 realized gain

After the treasurer distributes the earnings at the end of the year, the Distribution of Earnings Report will show the portion of all realized gains for the year on which each member must pay taxes.

Example 2: Unrealized gain

The club buys 100 shares of a stock on January 3 for $1000 plus a $35 commission. This makes a cost basis of $1035. On July 3, the treasurer enters a valuation of $12 per share. The value of the 100 shares is now $1200. This creates an unrealized gain of $165. The value of the club is increased by $165, but the members pay no taxes on the increased value because the club still owns the shares and has received no cash.

$1200 - ($1000 + 35) = $165 unrealized gain

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