Recognition (tax)

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Recognition, in United States tax law, is a prerequisite to the consideration of gains and losses for the purposes of determining federal income tax liability. Even if the Realization (tax) requirement is met, gains and losses are taken into account only to the extent that they are also “recognized.” Recognition is mostly a matter of timing; the issue is not whether a gain or loss is taken into account, but when. The time of recognition may matter for a number of reasons, including the time value of money and the section 1211(b) limitation on capital losses in a single year.

Section 1001(c) of the Internal Revenue Code provides that gains and losses, if realized, are also recognized unless otherwise provided in the Code. This default rule has several exceptions, called “nonrecognition” rules, which are scattered throughout the Code. These exceptions often apply in situations in which a taxpayer shifts his investment from one piece of property to another piece of property. In such cases, where the taxpayer is merely continuing his investment, it makes sense to defer the recognition of any gain or loss realized until the taxpayer truly ends the investment.

Sections 1031-1045 provide the most commonly implicated nonrecognition rules, including the section 1031 rule for Like-Kind Exchanges.