Quick Answer
Statements show current market value, which produces unrealized gains and losses on open positions. Only a sale or disposition realizes a gain or loss, and only realized amounts are taxable, reported to the customer and the IRS on Form 1099-B using the security's cost basis.
Now that you understand confirmations (per-transaction) and statements (periodic summaries), this lesson looks at what those statements actually report: account value, gains, losses, and cost basis.
What Separates a Realized Gain From an Unrealized One?
This is a fundamental distinction that affects both account reporting and tax treatment:
| Type | Definition | When It Occurs | Tax Impact |
|---|---|---|---|
| Realized | Gain or loss from an actual sale or disposition of a security | When the position is closed | Taxable event in the year of sale |
| Unrealized | Paper gain or loss on a position still held | While the position remains open | Not a taxable event until the position is closed |
- Account statements reflect the current market value of positions, showing unrealized gains and losses
- Realized gains and losses are reported on confirmations and year-end tax documents (Form 1099-B)
Example: You buy 100 shares at $50. The stock rises to $70.
- Unrealized gain: $2,000 (shown on your statement, not taxable yet)
- If you sell at $70: Realized gain of $2,000 (reported on Form 1099-B, taxable)
Who Tracks Cost Basis?
- Broker-dealers must report cost basis to both the customer and the IRS (on Form 1099-B) for covered securities
- Covered securities are most securities bought in recent years (stocks, bonds, options, mutual funds): the broker-dealer tracks and reports the cost basis
- Non-covered securities are older holdings: the investor tracks and reports their own cost basis
- Cost basis determines the gain or loss when a security is sold
Think of it this way: Cost basis is your starting line. When you sell, the IRS measures how far you moved from that line to determine your taxable gain or loss.
Exam Tip: Gotchas
- Unrealized gains are NOT taxable. Only realized gains trigger a tax event. The exam may describe a customer whose portfolio has appreciated significantly and ask about tax consequences. If the customer hasn't sold, the answer is no taxable event has occurred.
What Should You Check on Exam Day?
- Unrealized = paper gain/loss on an open position, shown on the statement, not taxable
- Realized = gain/loss from an actual sale, reported on the confirmation and Form 1099-B, taxable in the year of sale
- Cost basis for covered securities is tracked and reported by the broker-dealer; for non-covered securities, the investor tracks it
- A rising account value with no sale means no taxable event has occurred yet