Unrealized/Realized Gains and Losses

[Bill Gribble]

On Thu, Aug 02, 2001 at 03:24:20PM -0500, Linas Vepstas wrote:
> Umm, this is similar to the earlier 'cash flow' argument.  How can the
> report generator tell apart 'unrealized' loss from 'ordinary depreciation' 
> if there isn't  at least have a checkbox on the account?  (the alternative
> is to have a checkbox on each transaction). 

Depreciation is different.  From a tax perspective, it's the process of 
gradually changing an asset into an expense, allowing you to write off
a fraction of its value every year.

Depreciation (as I understand it) should be a normal expense account
called Depreciation Expense or similar.  As an asset is depreciated,
value is transferred from the asset account to the expense account.
At the end, the asset value is 0 and the expense value is whatever the
asset was originally worth.  This is important because expenses can be
deducted from your taxable income, but the cost of purchasing assets
can't.  If you don't show expense associated with depreciation you get
no benefit.

Unrealized gains and losses are only meaningful for planning purposes,
as far as I can tell, insofar as they aren't actual "depreciation of
assets" from the IRS perspective.  You mentioned the example of stock
option values earlier in this thread.  That's not an unrealized
gain/loss either; by IRS rules, options are just a special kind of
income, and the basis value of the options-as-an-asset is the fair
market value that they had when you were given them.

So, in short, the report generator can tell depreciation from
unrealized loss because in depreciation the actual value of the asset
is decreased by transactions to an expense account.  In unrealized
loss the market value of the asset is decreased by a change in the
market price of the asset, but there's no income or expense associated
with it because no transaction or financial event takes place.

b.g.