When you calculate your Capital Gains and where the sale receipts from the capital asset is less than cost of acquisition (whether indexed or not) and expenses on transfer – instead of a capital gain you incur a capital loss.
While capital gains are taxed according to the tax rate applicable, based on the type of asset and they are long-term or short-term. Let’s understand how capital losses are treated.
Set off of Capital Losses
The Income-tax Act,1961 does not allow loss under the head capital gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head.
Long Term Capital Loss can be set off only against Long Term Capital Gains.
Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.
Carry Forward of Losses
Fortunately, if you are not able to set off your entire capital loss in the same year, both short-term and long-term loss can be carried forward for 8 assessment years immediately following the assessment year in which the loss was first computed.
If capital losses have arisen from a business, such losses are allowed to be carried forward and carrying on of this business is not compulsory. Do you have previous year’s losses you want to carry forward – Here’s a very easy guide that explains how you can add your previous year’s losses to your IT Return on cleartax.in.
Let’s try to understand this with the example below
During the FY 2023-24, Mr Chetan has the following income and brought forward losses:
Particulars
Amount
Short-term capital gains on sale of shares
1,75,000
Brought forward Long-term capital loss of AY 2022-23
(96,000)
Short-term capital loss of AY 2023-24
(42,000)
Long term capital gain u/s 112
85,000
What is the capital gain taxable in the hands of Mr. Chetan for the AY 2024-25?
Solution:
Particulars
Amount
Amount
Short-term capital gains on the sale of shares
Less: Brought forward short-term capital loss of the AY 2023-24
Long-term capital gain
Less: Brought forward long-term capital loss of AY 2022-23 of Rs96,000 set-off to the extent of Rs 85,000
Taxable short-term capital gains
1,75,000
(42,000)
85,000
(85,000)
1,33,000
Nil
1,33,000
Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-term capital loss of AY 2022-23 of Rs 11,000 (i.e., Rs 96,000 – Rs 85,000) has to be carried forward to the next year to be set off against long-term capital gains of that year.
Treatment of Long-term Loss on Shares and Equity Funds
If you have incurred a long-term capital loss on selling shares or equity mutual fund units after 31.3.2018 then you can set them off against any LTCG. As profits/gains on long term shares or equity funds are now taxable in excess of Rs.1 lakh.
Also, you can carry forward these losses for setting off in later years up to 8 assessment years. Prior to 31.03.2018, there was no tax on long term gains on shares & equity funds, therefore long term gains on shares & equity funds were considered as a dead loss. Therefore, the same was not allowed to set off or carried forward.
Shares and Equity Funds are long term capital assets when held for more than 12 months.
Mandatory Filing of a Return
To keep a track of your losses, the income tax department has laid out that losses for a year cannot be carried forward unless that year’s return has been filed before the due date.
Even if it’s a loss return, you do not have any income to show – do file your return before the due date.
The most effective way to use capital losses is to deduct them from your ordinary income. You almost certainly pay a higher tax rate on ordinary income than on long-term capital gains so it makes more sense to deduct those losses against it.
Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
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.
Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income.
The Internal Revenue Service (IRS) allows investors to use capital losses to offset up to $3,000 in ordinary income per year. But to understand this concept fully, it's crucial to explore what capital losses are, the distinction between short-term and long-term losses, as well as the rules surrounding capital losses.
If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.
Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
However, U.S. tax code generally does not allow you to skip a year for using capital loss carryovers. You are usually required to use them in the next tax year, offsetting capital gains first before applying any remaining amounts to reduce up to $3,000 of other kinds of income.
Losses can only be carried forward if the income tax return for that financial year in which losses are incurred is filed on and before the due date as per section 139(1). In the case of house property, losses can be carried forward even if the income tax return is filed after the due date.
My understanding is that, provided you have reported the losses in previous tax returns, and provided that they have not been used to offset gains in earlier years, you can carry them forward indefinitely.
At the federal level, businesses can carry forward their net operating losses indefinitely, but the deductions are limited to 80 percent of taxable income.
Carry Forward: Non-speculative business losses can be carried forward for 8 assessment years and can be set off against future business profits. However, losses from speculative businesses are restricted to being set off against speculative profits.
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).
Hence, brought forward long term capital loss from previous financial year (return filed under regular tax regime) can be set-off against long term capital gain in the assessment year 2024-25 under simplified tax regime.
The IRS allows you to apply up to $3,000 in net capital gains losses to reduce other taxable income. This lets you potentially save money on taxes. The net capital losses can be applied to ordinary income as well as dividend income. Otherwise, however, capital losses can't be used to shelter dividend income from taxes.
Introduction: My name is Merrill Bechtelar CPA, I am a clean, agreeable, glorious, magnificent, witty, enchanting, comfortable person who loves writing and wants to share my knowledge and understanding with you.
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