# What Is Realized Profit?

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Definition

Realized profit” is a term for funds earned from an investment. They are the gains or earnings from an investment, calculated by subtracting the original amount paid from the asset’s sale price.

## Definition and Example of Realized Profit

Realized profit is the net proceeds, or gains, from an investment. It is calculated by taking the total proceeds of a sale and subtracting the initial investment amount and any fees. You can’t calculate realized profit until the sale has been made and exited.

For example, say you paid \$200 for 10 shares of a company, then those shares rise in value from \$20 per share to \$30 per share. You then sell your stock for a total of \$300. In this case, your realized gain would be \$100 (\$300 − \$200 = \$100).

## How Realized Profit Works

Realized profit is a simple but important concept in investing. It’s the money you earn and keep, after expenses, from an investment. For most investors, realized profit is the ultimate goal of investing.

### Note

Realized profit results from an investment after the period when it is considered an unrealized profit. Unrealized gains, sometimes called “paper profit,” are your gains according to the current value of the investment but before you’ve made a sale. It's a theoretical profit.

Until you sell and see the profit in your brokerage or bank account, the gain could be lost. Once it is recognized and recorded in the books, unrealized profit becomes realized profit.

Here’s a detailed example to show you how realized profit works. Let’s say you bought shares of ABC Company for \$1,000. After holding the stock for 10 years, you sold all of those shares for \$2,500. The purchase was commission-free, but the sale had a \$5 fee. To calculate your realized profit, you can use this formula:

Realized Profit = Sale Proceeds - Fees - Purchase Price

In this example:

Realized Profit = \$2,500 - \$5 - \$1,000

Realized Profit = \$1,495

In the U.S., realized profits are often treated as capital gains for tax purposes. That means you must pay taxes on the profit you earn from investing. Short-term gains on investments held for one year or less are taxed as ordinary income, while long-term gains are usually taxed at a lower rate—no more than 15% for most people. You can report capital gains to the IRS on Tax Form 8949.

### Note

Unrealized profits are not taxed, so holding on to an investment may defer taxes as long as you keep it. If you lose money on an investment and have a realized loss, you can use that to offset realized gains in many cases.

## Realized Profit vs. Unrealized Profit

Realized profit is similar but not the same as unrealized profit. Here’s a side-by-side comparison.

## What It Means for Individual Investors

Realized gains are not enough to replace income for most working adults, but many Americans look to investment realized profit to help fund their retirement or supplement other income sources.

Once an investment is sold, there is no more opportunity for investment gains, and the investment may be taxable. Conversely, before you sell, the value of an investment may still change, and any profit or loss is unrealized. Depending on your investment goals and strategy, it may be best to sell an investment and recognize the gain, or it may be better to keep holding it.

Every investor and investment is unique. Take the time to understand your investments and when it makes sense to turn paper profit into a realized gain.

### Key Takeaways

• Realized profit is profit from a completed investment when your gains are locked in.
• Before an investment is sold, gains are considered unrealized and remain at risk of loss.
• Profits from realized gains are often considered income for tax purposes.

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