We all want to make profits on our investments. No one wants losses. Investments, especially in stocks or equity mutual funds attract lot of risk. So sometimes, we may end up making losses on these investments. These can be short term capital losses or long term capital losses.
Is there any option to turn these losses into gains? Can I maximize income by properly accounting for losses while calculating the tax liability?
Let us understand – what are financial assets? What are long term and short term capital gain/loss? How to set off the short term losses of stock investments?
Stocks are Financial Assets
Capital asset typically refers to anything the individual owns for personal or investment purposes. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating.
Capital assets are further classified as Financial asset and non-financial asset. Financial assets are intangible and represent the monetary value of a physical item.
Stocks (Shares) and equity mutual funds are examples of Financial Assets.
Short Term Capital Gain/Loss – (STCG / STCL)
If a financial asset is held for less than 12 months then that asset is treated as Short Term Capital Asset. And the investor will make either Short Term Capital Gain or Short Term Capital Loss on that investment.
Long term Capital Gain/Loss – (LTCG / LTCL)
If a financial asset is held for more than 12 months then that asset is treated as Long Term Capital Asset. And the investor will make either Long Term Capital Gain or Long Term Capital Loss on that investment. ( For Non Financial Assets , the duration is 36 months)
Can I set off Short Term Capital Losses made on Stocks or Equity Mutual Funds?
Can you gain from the short term losses you made on stocks? Yes, you can set them off against the Short Term Capital Gains (or) Long Term Capital Gains that you might have made on other capital assets. These other capital assets are like Property, Gold, Debt Mutual Funds etc.,
Example – Mr Jagan bought a property in 2009. He also bought some companies shares (mainly penny stocks) worth Rs 6 Lakhs, in January 2013. He made these investments through his Demat Account.
In September 2013, he sold the property (he held the property for more than 36 months, so it is a Long Term Capital Asset). And made Long Term Capital Gains (after indexation) of Rs 30 Lakhs.
The applicable Tax rate on LTCG is 20%. So, Jagan has to pay Rs 6 Lakhs as capital gains tax (20% on 30 Lakhs).
But he was not that lucky with his portfolio of stock investments. He sold the shares in October 2013, and booked losses to the tune of Rs 3 Lakhs. Since he sold the shares in less than 12 months, these losses are treated as Short Term Capital Loss.
So, he made Rs 30 Lakhs LTCG and Rs 3 Lakhs STCL during the Financial Year (2013-2014). Jagan filed his Income Tax Returns on time and took help of a Chartered Accountant. While calculating his tax liability, his CA deducted Rs 3 Lakhs (short term losses) from Rs 30 Lakhs (Long term gains). And calculated 20 % tax on Rs 27 Lakhs only.
Setting off a short-term loss of Rs 3 Lakh against long term gains helped him in saving Rs 60,000.
Carry Forward of Short Term Capital Losses
What if you have not made any Capital Gains on other assets in a fiscal year? In this scenario, you can carry forward the Short Term Capital Losses to subsequent 8 fiscal years.
Important points to be noted
- Short Term capital losses can be carried forward only if you file Income-Tax returns on time.
- Also note that the capital losses can not be set off against other income heads like Salary, Business Income, Income from other sources etc.,
Another important point is The Long Term Capital Losses on stock or equity fund investments can not be set off against any other capital gains. Now (effective from FY 2018-19) that the long-term capital gain on sale of equity funds and listed shares is going to be taxable, you can expect long-term capital losses on the sale of equity shares or equity mutual fund units to set off capital gains. (Related article : ‘Budget 2018 LTCG Tax on Equity Mutual Funds & Important Implications.’)
How to get Capital Gains/Loss Statement?
You may find it very cumbersome to calculate the capital gains or losses on your stock investments. Good news is, most of the demat account service providers now provide Capital Gains Statement online. You may also raise a request for the capital gain statement.
Below are the screen print images of a ICICI Direct demat account. Similar to these options, you may find the required links on your demat account too.
Many investors try to ignore about the losses they made on stock investments. Yes, it is better to forget about them but learn from these mistakes and try not to repeat them. At the same time, be prudent and try to minimize your tax liability. Set off short term capital losses on stocks and equity mutual funds whenever it is possible.
Hope this post is informative. Do share your stock investment experiences. Cheers!
( Image courtesy of imagerymajestic at FreeDigitalPhotos.net)