Depending on the performance of the market, equity portfolios are vulnerable to market risk and could experience capital gains or losses.
Most individuals are unaware of how this income is taxed when it comes to buying and selling shares, but they should be informed that income/loss from the sale of equity shares is treated under the head "Capital Gains."
There are several rules and provisions for capital losses under the Income Tax Act, and as a result, taxpayers should be much aware of the ways to set off losses in Income Tax Returns (ITR) and reduce their tax liability which we are going to discuss here.
Rules to set off capital losses in Income Tax Returns (ITR)
Shareholders can counterbalance market losses against gains and carry forward any residual losses to subsequent fiscal years to lower their tax liability.
Capital losses incurred from the sale of shares or mutual funds cannot be reported against the head salary income. Gains or losses made from stock market investments are categorised under the Income Tax Rules as capital gains/losses, business income/loss, and speculative income/loss.
Based on these types of transactions, any income from stock market deals may be taxed as capital gains on investment or as profits and gains from a business or profession. Income is further divided into Long-term capital gains and Short-term capital gains under the heading "Capital Gains."
Short-term capital gains are taxed at 15% regardless of your tax bracket if equity shares listed on a stock exchange are sold within 12 months of purchasing. The buyer may realise a short-term capital gain (STCG) or face a short-term capital loss (STCL) as a result. Whereas the capital loss can be adjusted on long-term capital gain or short-term capital gain for the next 8 assessment years.
Shareholders should be aware that equity share sales that result in any short-term capital losses may be offset by equity asset sales that result in either short-term or long-term capital gains. It can be offset by any long- or short-term capital gains under the head of other sources of income if the shareholder fails to set off his or her entire capital loss in the same assessment year, as per section 35AD.
In case of long-term capital gain or loss where the holding period is more than 12 months, the long-term capital gains are taxed at 10% without the benefit of indexation in case of the sale of listed securities and it exceeds Rs. 1,00,000 under Section 112A.
Whereas in the case of capital loss, it can be adjusted for long-term capital gain for 8 years.
In the case of intraday trading, where the shares are bought and sold on the same day, the capital gains made are treated as speculative business income and are taxable as per your applicable tax slab rates.
Whereas any capital loss made can only be set off against speculative income for 4 years.
Conclusion
To carry forward losses to the following 8 assessment years, the taxpayer needs to file his or her ITR on time as per Section 139(1). As per the Income Tax Act, loss under the head “Profits and gains of business or profession” can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
Individuals must comprehend that only long-term capital gains may be offset by long-term capital losses. However, a short-term capital loss can be offset by a long-term or short-term capital gain, but a loss under the "Capital gains" head cannot be offset against income under the head income from other sources, as per the provisions set under Income Tax Act.
(The author is CEO, GCL Broking)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
FAQs
Those losses that you took in the previous calendar year in your portfolio can now be used to save you some money. When filing your taxes, capital losses can be used to offset capital gains and lower your taxable income. This is the silver lining to be found in selling a losing investment.
Is it worth claiming stock losses on taxes? ›
Those losses that you took in the previous calendar year in your portfolio can now be used to save you some money. When filing your taxes, capital losses can be used to offset capital gains and lower your taxable income. This is the silver lining to be found in selling a losing investment.
Can you use capital loss to reduce income tax? ›
Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
Can you offset capital gains losses against income tax? ›
Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).
Can you offset capital gains with losses for stocks? ›
You can also carry the capital losses forward indefinitely, to be offset against future capital gains. If you are selling the "loss" shares near the end of the year, make sure the settlement date will be on or before the last business day in December, to be included as a sale in the current year.
Why is capital loss limited to $3,000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
How to write off losses on stocks? ›
Normally this process is straightforward. You realize the loss by selling the investment, and your broker records the loss on its annual Form 1099-B for your account. Then you report the loss on Schedule D when tax time rolls around and you get your tax write-off.
How can you use capital losses to help your tax situation? ›
Capital losses can be used as deductions on the investor's tax return, just as capital gains must be reported as income. Unlike capital gains, capital losses can be divided into three categories: Realized losses occur on the actual sale of the asset or investment. Unrealized losses are not reported.
How many years can capital losses be carried forward? ›
If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.
What is the maximum capital loss deduction? ›
Capital loss carryover is the net amount of capital losses eligible to be carried forward into future tax years. Net capital losses (the amount that total capital losses exceed total capital gains) can only be deducted up to a maximum of $3,000 in a tax year.
Stocks sold at a loss can be used to offset capital gains. You can also offset up to $3,000 a year of ordinary income. A silver lining of investment losses is that you can lower your tax liability as a result.
What happens if you don't report capital losses? ›
If you do not report it, then you can expect to get a notice from the IRS declaring the entire proceeds to be a short term gain and including a bill for taxes, penalties, and interest.
What is the time limit for share loss relief? ›
The time limit for a claim to offset a loss on the disposal of shares in an unquoted trading company against income is the first anniversary of the normal self-assessment filing date for the year of the loss.
What is the 30 day rule for capital loss? ›
Superficial Loss: When employing tax-loss harvesting, make sure to consider the CRA's “superficial loss” rule. According to this rule, investors claiming a capital loss on the sale of an investment cannot buy the same investment within 30 days of the sale.
Can I use more than $3000 capital loss carryover? ›
The IRS caps your claim of excess loss at the lesser of $3,000 or your total net loss ($1,500 if you are married and filing separately). Capital loss carryover comes in when your total exceeds that $3,000, letting you pass it on to future years' taxes. There's no limit to the amount you can carry over.
How long can you claim a stock loss on your taxes? ›
Deducting Capital Losses
If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years."
How much do stock losses reduce taxes? ›
Deducting Capital Losses
If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years." Here are the steps to take when it comes to tax filing season.
How much do you get back in taxes for stock losses? ›
If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.
