Finance: What is a Realized Gain or Loss?

When you realize a gain or loss, it means that you turn an investment into cash. Thrilling, we know.

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Transcript

00:32

living in a van down by the river well then you probably realized a loss and

00:36

you probably also realized the importance of owning real estate that [White van moving into river]

00:40

doesn't roll why is it important to understand realized gains and losses

00:44

rhymes with shmaxes well the government at least thus far does not tax Americans

00:49

on the assets they have rather it taxes them only when they convert those assets

00:55

into cash assets like stocks bonds real estate appreciated crayon drawings that

01:02

got sold on eBay for a big price if someone pays you cash then its taxable [eBay crayon listing appears]

01:06

the idea being that an investment in a vacuum by itself isn't all that useful

01:11

like owning shares in a private company that's probably worth a lot more but may

01:16

or may not be worth anything later when you go to sell it or even if that

01:19

company's public you own a lot of shares in it well until you turn them into cash [Shares transform into cash]

01:23

nothing is certain because even public companies can go down a whole lot in

01:27

value so the government keeps its sticky paws off of those things things that are

01:32

just investments and only comes a-knockin when the investments are

01:35

converted into cash and you know that cash can be used to do stuff like buy [Investment assets transform into pile of cash]

01:40

cars and pay tuition and rent and get the occasional multicolored water slide

01:45

for the front entryway one big double yellow line on the highway is crossed [Car driving along highway]

01:48

after one year that is when you've made an investment and held it for at least a

01:53

year and then you go to sell it well you generally get a lower tax rate

01:57

applied to you then you would have had you held that investment less than a

02:02

year why well if you're holding it a year the government wants to reward you [Man holding stocks]

02:06

and it makes the markets more stable when you hold the investments

02:10

long period of time so they give you a tax break by encouraging people to marry

02:13

investments holding them many years instead of just dating them for a few [Man at altar with investment bride]

02:17

weeks while one goal the politicos have is to create a more stable predictable

02:21

investment climate it makes a lot of sense all right and predictable is good

02:25

like a pun at the end of a shmoop video oh we barely got one in there [Man sitting on a bench and bear appears]