Unrealized Gain Monetization

There is another financial instability that results from unrealized gains. In the current model, capital gains contribute to earnings. If a coop’s assets increase in value, it results in earnings for the cooperative. For assets that are marked to market, these earnings arise even if the assets are not sold.

A coop pays out profits or patronage to members based on total earnings, which includes unrealized gains. But coops generally pay out some patronage in the current period (as required by tax law), even if some of those earnings are not realized by the assets being sold. This has the potential to create cash flow issues. No cash is generated from unrealized capital gains, yet they result in cash payments to the members. If the portion of unrealized capital gains that must be paid out in patronage exceeds the liquidity of the coop, the payout will be problematic. In a worst case, it could force coop asset sales to make patronage payments.

A situation where a coop has large unrealized capital gains and an operating loss, is one situation where patronage payout might be an issue.This is rare in practice due to the small number of asset intensive worker cooperatives, and many classes of assets that not marked to market.

In the United States patronage distributions are generally non-taxable at the corporate level. Capital gains can be included as patronage if the assets were “directly related” to or “actively facilitate” the business of the coop. Legal ruling have determined that under those circumstances patronage income can include interest, dividends, stock, real estate, and capital gains.