Losses are difficult to deal with. But while you invest, you sometimes encounter loss due to wrong speculations, unprecedented conditions, or for any other reasons. When it happens, you need a better strategy to deal with it. Under certain circumstances, you can offset a capital loss against capital gain to lower your tax burden. However, to use a capital loss to your advantage, you need a better understanding of it. Know the difference between short-term vs long-term capital loss to get the most from your investment.
What Is Capital Loss?
Loss arises when you sell goods or service or an asset at a price lower than its purchasing cost. A capital loss occurs when an asset, including stocks, property, jewelry, and bonds are sold at a depreciated value than its purchasing price. Depending on how long you have invested in it, the loss is either short-term or long-term.
Long-term capital loss occurs when the asset is sold after a year. Conversely, short-term loss arises when the investment period is less than twelve months. You can claim capital loss in your income tax return to lower your tax liabilities. However, not all capital losses are eligible for reporting, and there is a specific process to claim a tax deduction on your capital loss.
Key Takeaways
- – When you sell a capital asset, the resultant value is called capital gain/loss
- – Capital losses are reported when the asset selling price is lower than its buying price
- – Long-term capital loss arises when the investment period is more than twelve months
- – Short-term capital loss is defined when the asset is traded within one year of purchase
- – The income tax laws allow you to report capital losses in your tax return filing to offset capital gain tax
- – short-term capital loss vs long-term capital loss, the difference arises based on the duration of the investment
- – Understanding the differences between short and long term losses will also help you hold on to profitable investments for longer since tax level go down significantly on long-term investments
Calculating Capital Losses
So, how would you know if you have made overall gain or loss in your deals? To determine that add all short-term gains together. Similarly, add all the losses as well. If the volume of losses is higher than the total profit, you have earned an overall loss in your short-term investment. Likewise, calculate capital gain/loss on your long-term investments.
Capital Losses And Taxation
From 2018, capital gains were made taxable. But there is also a provision, where capital losses can be reported under the head of capital gain/loss to offset any tax liability arising from capital gain. Yes, only capital losses can be reported against capital gains. It can’t be adjusted against other types of income, like salary or business turnover. Fortunately, you can carry forward capital loss, both short-term and long-term, in the subsequent years, upto eight years, till you can adjust it in full when a capital gain arises.
You can offset an entire capital loss in a fiscal year if you have earned enough capital gain during the period. Short-term losses can be adjusted for both short-term and long-term gains.
Let’s consider the above situation with an example. Suppose you have earned a long-term capital gain of Rs 1.10 lakh and subsequently a short-term loss of Rs 75,000. You can apply the short-term loss to offset tax liability arising from long-term gain.
Conclusion
When you are investing, capital losses are inevitable. But there are ways to prevent capital losses from impacting your income from the investment. You can use it to lower your tax burden and adjust it against your gains. However, to take advantage of capital loss adjustment, you must file your tax within the deadline. This facility does not apply on belated filing.
FAQs
What is capital loss?
A capital loss is incurred when the selling price of an asset is less than its original price. A capital loss can arise from selling any investment like stocks, bonds, commodities, real estate, etc.
What is the difference between short-term and long-term capital losses?
The difference between short and long-term capital losses depends on the duration of the holding. A short-term capital loss arises when the holding period is less than 12 months, while a long-term capital loss arises when the holding period is more than one year (depending on the asset).
How are short-term capital losses and long-term capital losses treated for tax purposes?
Long-term capital losses can only be offset against long-term capital gains. However, short-term capital losses can be adjusted against short or long-term capital gains. Finally, the net loss of either type can then be deducted from other kinds of gains.
What are the time limits for carrying forward capital losses?
Investors can carry forward both short and long-term capital gains for 8 assessment years.
Can I adjust long-term losses against short-term capital gains?
No, adjusting long-term capital losses against short-term capital gains is not allowed. Long-term capital losses can only be offset against long-term capital gains.
