EN
One needs to understand how capital losses work to manage finances wisely. There can be many reasons for losses, such as market volatility, unexpected events, or simple misjudgments. Having a clear strategy can be highly beneficial. If you have clarity on the difference between long-term capital loss and short-term capital loss, you can reduce your tax burden and strengthen your overall financial position.
Capital profits can sometimes be used to cover capital losses. This reduces the effects of market downturns. However, you can only take advantage of this benefit if you completely comprehend how each kind of loss is manged and how it complies with tax regulations. Understanding these ideas will help you make wise choices and maximise the return on your investments.
Key Takeaways
-
Capital losses occur when an asset is sold for less than its purchase price. A short-term or long-term classification is done on the basis of its holding period.
-
Capital losses can be used to offset capital gains. It helps to reduce your overall tax burden. However, it cannot be adjusted against other types of income.
-
Both short-term and long-term capital losses can be carried forward for up to 8 years. It can be applied in future years when capital gains arise.
-
You can benefit from capital loss adjustments only if you file your returns on time because it’s not available for late or belated filings.
Understanding Capital Loss
Loss arises when you sell goods or services or an asset at a price lower than its purchasing price. A capital loss occurs when an asset, including stocks, property, jewellery, and bonds, is sold at a lower value than its purchase 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 12 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.
Short-Term Capital Loss
Short-term capital loss occurs when you sell an asset that you have held for less than 12 months at a price lower than what you paid for it. Short–term capital loss can be used to reduce your tax bill by offsetting it against any short-term capital gains you earn in the same financial year. This helps lower the overall taxable amount.
To make the most of this benefit, you must calculate and report your short-term capital loss correctly when filing your tax return. Proper reporting ensures you follow tax rules and do not miss out on available tax relief.
Long Term Capital Loss (LTCL)
Long-term capital loss occurs when you sell an asset after holding it for more than 12 months. It is different from a short-term capital loss, as each has its own rules, duration and tax treatment. For instance, you cannot set off long-term capital loss against short-term gains nor against income from other sources, like salary or business income. However, under new provisions, there is a one-time relief where you can set off LTCL for long-term capital loss up to March 31, 2026, against any capital gains, including STCL.
When working out your capital gains, it is important to keep long-term and short-term losses separate. This helps ensure accurate reporting and full compliance with tax regulations.
It also helps you manage your investments more effectively, make better use of available tax benefits, and plan your finances with greater confidence.
Short Term vs Long Term Capital Loss
Capital losses are an important part of investing and tax planning. A loss occurs when you sell an investment for less than you paid for it. Understanding how short-term capital loss and long-term capital loss work help you plan better and manage your tax liability.
Tax Implications and Strategies
-
Short-term losses are used to offset short-term gains first. Any remaining amount can then be used to reduce long-term gains.
-
Long-term losses are matched with long-term gains first, followed by short-term gains.
-
If your total losses are greater than your total gains, you may be able to deduct part of the excess from your ordinary income, subject to yearly limits.
Knowing these rules helps you make smarter decisions about when to sell an asset for a tax advantage.
Carryover Provisions and Limitations
-
If you cannot use all your capital losses in the same tax year, you can carry them forward.
-
Carrying forward losses allows you to apply them to future gains, giving you more control over long-term tax planning.
Understanding these carryover rules helps you time asset sales and maximise your overall tax benefits.
Calculating Capital Losses
So, how would you know if you have made an 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.
Example of Capital Loss
Suppose you made three short-term transactions in a year.
• Gain of ₹50,000
• Gain of ₹20,000
• Loss of ₹90,000
Total short-term gains: ₹70,000
Total short-term losses: ₹90,000
Since the losses exceed the gains, you have an overall short-term capital loss of ₹20,000 for the year.
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 8 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 ₹1.10 lakh and subsequently a short-term loss of ₹75,000. You can apply the short-term loss to offset tax liability arising from long-term gain.
Conclusion
When you invest, experiencing capital losses is a natural part of the process, but what matters most is how effectively you manage these losses. This is where understanding the difference between short-term capital loss and long-term capital loss is crucial. It will help you make sound financial decisions and reduce the impact on your overall returns.
Short-term capital losses can offset both short-term and long-term gains, while long-term losses are generally used against long-term gains first. Each type also has its own tax treatment and can be used differently when planning your finances.