What is a Realized Profit and Loss?

A realized profit or loss is a capital

gain or a loss that is the
result of a completed transaction. Realized profits are usually
taxable making them different than paper profits.

For example, a paper profit is a profit that hasn’t yet been realized through a transaction. If you buy a stock for $50 and its value jumps to $75, you have a paper profit of $25. If you do nothing, your profit is only on paper and not taxable yet. If you sell the stock and complete the transaction, you have a realized profit of $25 which may be taxable.

If you bought a stock for $50 and its value sinks to $25, you have a paper loss of $25 if you do nothing. You can’t report this as a loss because you have not sold it and realized your loss yet. If you do sell the stock at its reduced value, you have a realized loss which you may be able to use to offset your tax bill.

Realized profits and losses are the result of completed transactions not simply a rise or fall of an item’s value.