tax-law ownership
When does money become money? (When is a debt &quot;realized&quot;?)
<p>A lot of taxable liabilities depend on the notion of when a monetary gain is &quot;realized&quot;, but it is not clear to me how this is defined legally.</p>
<p>For example, if a person sells stock, then the brokerage will credit the cash account of the client. The client does not actually have the money in the sense that the brokerage &quot;owes&quot; them the money, but since the brokerage can be viewed as sort of a bank, then the gain could be considered realized.</p>
<p>So, take a different kind of debt. A gambler wins money at a casino, but just has chips. If the gambler keeps the chips, obviously the chips are not &quot;money&quot; so the gain cannot be said to be &quot;realized&quot;. Now, suppose the gambler cashes the chips, but only to his account at the casino. The casino now owes the money to the gambler but has not paid it. The casino is not a bank, so the customer's balance is a commercial debt, not money.</p>
<p>So, if you consider that to be a &quot;realized&quot; gain of money, does that mean any business credit is? For example, if a vendor issues a business a new credit for some reason, then is that gain &quot;realized&quot; as soon as the vendor notifies the business of the credit, or only when the business receives a check for the credit and actually deposits it in its bank account?</p>
<p>For example, if I sell something to a business, they owe me the money for the good, but that is not a &quot;realized&quot; gain yet, until they actual pay me and the money is in my bank account.</p>
<p>So, basically the question revolves around possession of money and whether one can be said to &quot;possess&quot; money owed by a bank, casino, other business, person, or whatever.</p>
<p>One pretty obvious rule here is that only one person can possess the cash. So, either the cash belongs to me or the casino, not both, for example. If the casino is actually holding my money in a separate entitled account which is &quot;mine&quot;, then I guess theoretically the money is &quot;mine&quot;, but if the casino just considers my &quot;account&quot; to be just a ledger entry, then the cash does not really exist. It's just a debt they have to me, so it cannot be considered to be &quot;realized&quot;.</p>

<p>In general, a liquid account, denominated in monetary units (dollars, pounds, euros, etc) from which the owner has the right to make a withdrawal at any time is treated legally much the same as cash. This includes a bank account and a brokerage 'cash&quot; account. It will not include a mutual fund account denominated in shares of stock, nor a debt which is not collectable at will.  When the proceeds of a transaction are depositd into such an account, I believe that the profit (if any)m has been &quot;realized&quot; and that a taxable event has occurred.</p>
<p>Under <a href="https://www.law.cornell.edu/uscode/text/26/1001" rel="noreferrer">26 U.S.C. § 1001</a> a gain or loss is realized on the sale or other disposition, or exchange of property. Nothing is ssid about 'cash&quot; or accounts with a signature authority.</p>
<p>Under <a href="https://www.govinfo.gov/content/pkg/CFR-2009-title26-vol11/xml/CFR-2009-title26-vol11-sec1-1001-1.xml" rel="noreferrer">26 CFR 1.1001-1</a>:</p>
<blockquote>
<p>... the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained.</p>
</blockquote>
<p>in <a href="https://scholar.google.com/scholar_case?case=17477022459451533174&amp;q=Cottage+Savings+Association+v.+Commissioner&amp;hl=en&amp;as_sdt=80000002" rel="noreferrer"><em>Cottage Savings Ass'n v. Comm. of Internal Revenue</em>, 499 U.S. 554, 559 (1991)</a> The US Supreme Court wrote:</p>
<blockquote>
<p>Rather than assessing tax liability on the basis of annual fluctuations in the value of a taxpayer's property, the Internal Revenue Code defers the tax consequences of a gain or loss in property value until the taxpayer &quot;realizes&quot; the gain or loss. The realization requirement is implicit in § 1001(a) of the Code, 26 U. S. C. § 1001(a), which defines &quot;[t]he gain [or loss] from the sale or other disposition of property&quot; as the difference between &quot;the amount realized&quot; from the sale or disposition of the property and its &quot;adjusted basis.&quot; As this Court has recognized, the concept of realization is &quot;founded on administrative convenience.&quot; <em>Helvering v. Horst</em>, 311 U. S. 112, 116 (1940).</p>
<p>...</p>
<p>Section 1001(a)'s language provides a straightforward test for realization: to realize a gain or loss in the value of property, the taxpayer must engage in a &quot;sale or other disposition of [the] property.&quot; The parties agree that the exchange of participation interests in this case cannot be characterized as a &quot;sale&quot; under § 1001(a); the issue before us is whether the transaction constitutes a &quot;disposition of property.&quot;</p>
<p>...</p>
<p>Neither the language nor the history of the Code indicates whether and to what extent property exchanged must differ to count as a &quot;disposition of property&quot; under § 1001(a). Nonetheless, we readily agree with the Commissioner that an exchange of property gives rise to a realization event under § 1001(a) only if the properties exchanged are &quot;materially different.&quot;...</p>
<p>...</p>
<p>We start with the classic treatment of realization in <em>Eisner v. Macomber</em>, <em>supra</em>. In <em>Macomber</em>, a taxpayer who owned 2,200 shares of stock in a company received another 1,100 shares from the company as part of a *pro rata- stock dividend meant to reflect the company's growth in value. At issue was whether the stock dividend constituted taxable income. We held that it did not, because no gain was realized.</p>
<p>...</p>
<p>In <em>Phellis</em> and <em>Marr</em>, we held that the transactions were realization events. We reasoned that because a company incorporated in one State has &quot;different rights and powers&quot; from one incorporated in a different State, the taxpayers in<em>Phellis</em> and <em>Marr</em> acquired through the transactions property that was &quot;materially different&quot; from what they previously had. <em>United States v. Phellis</em>, 257 U. S., at 169-173;</p>
<p>...</p>
<p>Taken together, <em>Phellis</em>, <em>Marr</em>, and W<em>eiss</em> stand for the principle that properties are &quot;different&quot; in the sense that is &quot;material&quot; to the Internal Revenue Code so long as their respective possessors enjoy legal entitlements that are different in kind or extent. Thus, separate groups of stock are not materially different if they confer &quot;the same proportional interest of the same character in the same corporation.&quot; <em>Marr v. United States</em>, 268 U. S., at 540. However, they are materially different if they are issued by different corporations, id., at 541; <em>United States v. Phellis</em>, supra, at 173, or if they confer &quot;differen[t] rights and powers&quot; in the same corporation, <em>Marr v. United States</em>, supra, at 541. No more demanding a standard than this is necessary in order to satisfy the administrative purposes underlying the realization requirement in § 1001(a). See <em>Helvering v. Horst</em>, 311 U. S., at 116. For, as long as the property entitlements are not identical, their exchange will allow both the Commissioner and the transacting taxpayer easily to fix the appreciated or depreciated values of the property relative to their tax bases</p>
</blockquote>
<p>Thus <strong>any</strong> exchange of property for other property which is in some significant sense different, such as interests in different mortgages of similar market value, or <strong>any</strong> sale of property causes a gain or loss to be realized.It does not matter in what sort of account the proceeds are held, or even whether the proceeds are in cash as opposed to some other sort of property. The beneficial owner realizes a gain or loss, even if s/he is not the legal owner.</p>

<blockquote>
<p>For example, if a person sells stock, then the brokerage will credit
the cash account of the client. The client does not actually have the
money in the sense that the brokerage &quot;owes&quot; them the money, but since
the brokerage can be viewed as sort of a bank, then the gain could be
considered realized.</p>
</blockquote>
<p>Gain is realized when the stock is sold. A cash account has no risk of loss and is available on demand.</p>
<blockquote>
<p>So, take a different kind of debt. A gambler wins money at a casino,
but just has chips. If the gambler keeps the chips, obviously the
chips are not &quot;money&quot; so the gain cannot be said to be &quot;realized&quot;.
Now, suppose the gambler cashes the chips, but only to his account at
the casino. The casino now owes the money to the gambler but has not
paid it. The casino is not a bank, so the customer's balance is a
commercial debt, not money.</p>
</blockquote>
<p>Again, the gain is realized not later than when the chips are turned into the casino or removed from the casino (whichever comes first)m, arguably when the chips are won. Again, the key points are that there is no risk of loss and the chips can be converted to cash on demand.</p>
<blockquote>
<p>So, if you consider that to be a &quot;realized&quot; gain of money, does that
mean any business credit is? For example, if a vendor issues a
business a new credit for some reason, then is that gain &quot;realized&quot; as
soon as the vendor notifies the business of the credit, or only when
the business receives a check for the credit and actually deposits it
in its bank account?</p>
<p>For example, if I sell something to a business, they owe me the money
for the good, but that is not a &quot;realized&quot; gain yet, until they actual
pay me and the money is in my bank account.</p>
</blockquote>
<p>This depends upon the method of accounting you elect for tax purposes.</p>
<p>If you are an accrual basis accounting taxpayer, you have gain when the sale is made and the business credit obligation to you arises, and you take a bad debt deduction if the credit is not paid.</p>
<p>If you are a cash basis accounting taxpayer, you have gain only when the other business pays you, e.g., by delivering to you a check or an electronic payment or currency or a barter item in lieu of cash.</p>
