Account Value, Profits, and Losses
Now that you understand confirmations (per-transaction) and statements (periodic summaries), let's look at what those statements actually report: account value, gains, losses, and cost basis.
Realized vs. Unrealized Gains and Losses
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)
Cost Basis Reporting
- Broker-dealers must report cost basis to both the customer and the IRS for covered securities
- Covered securities include:
- Stocks acquired on or after January 1, 2011
- Most other securities (bonds, options, mutual funds) acquired after January 1, 2012 or later, depending on type
- 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.