Gains and losses are recognized for tax purposes until they are realized.

The statement incorrectly describes the relationship between realization and recognition of gains and losses for tax purposes. The realization principle dictates that a gain or loss must first be realized—typically through a sale, exchange, or other disposition of property—before it can be recognized. Recognition is the formal act of reporting the realized gain or loss on a tax return. Therefore, realization is a prerequisite for recognition; recognition does not occur until realization happens. The statement reverses this fundamental concept.

A. True: This is incorrect because recognition follows realization. A gain is not recognized for tax purposes before or "until" it is realized; it is recognized after it is realized.

1. Internal Revenue Code (IRC) § 1001.

§ 1001(a) establishes that a gain or loss is realized from the "sale or other disposition of property."

§ 1001(c) states, "Except as otherwise provided in this subtitle, the entire amount of the gain or loss... on the sale or exchange of property shall be recognized." This shows that recognition is the subsequent step after a gain/loss is determined (realized).

2. Cornell Law School, Legal Information Institute (LII).

In its Wex Legal Dictionary entry for "Realized and Recognized Gain," it states: "A gain is not taxed until it is both realized and recognized. A gain is realized when a taxpayer sells an asset... A realized gain is recognized when it is recorded on the tax return." This clarifies that realization precedes recognition.

3. University of Virginia School of Law, Courseware.

In materials for the "Federal Income Tax" course, Professor George K. Yin explains the realization requirement as a cornerstone principle, citing the Supreme Court case Eisner v. Macomber, 252 U.S. 189 (1920). The course materials emphasize that income from property is not taxed until a realization event, such as a sale, occurs, after which it may be recognized. (See, e.g., Syllabus and Course Materials for UVA Law, Federal Income Tax, Fall semesters).