Invest karne se pahle amateur traders kaafi baar khud se sawal puchte hai: Yaar, mera loss ho gaya toh? Sach baat to yah hai ki stock market mein hamesha profits koi nahin kamata. Bahut legendary money managers ke market ko beat karne ke streak bhi toote Hain. Kaafi intelligent investors ne acche investment options ko miss kiya hai.
Therefore losses are an inevitable part of dealing with financial markets. This is not because of a specific problem with financial markets, per se. Losses are inevitable in the financial markets because financial markets are unpredictable. Financial markets are unpredictable because life is unpredictable. Unpredictability toh har income stream mein Hoti hai.
If you are a salaried employee, then you are receiving money from an organisation that could potentially fire you. If you have your own business, then the business may not be able to cover its costs tomorrow. Therefore, while there are risks that you undertake when you take part in the financial markets, there are risks to be taken in other aspects of life as well.
The good thing is that it is possible to use your losses in the financial markets to reduce your tax liability with them. Yah baat aapko kuchh confusing lag rahi hai? Do not worry. Iss podcast mein ham yahi charcha karenge ki stock market mein hue losses ko apna tax burden kam karne ke liye kaise use kiya jaaye.
First of all, let's emphasize the fact that we are not only talking about losses in the stock market.
We are talking about capital losses in general. When is a person said to have gone through a capital loss? For example, suppose aapne ek property kharida aur 3 saal baad uss property ko bheja. If the price at which you sold the property is less than the sum of the price at which you acquired the property plus the cost of transfer, then you are said to have undergone a capital loss.
On top of that, you are said to have undergone a long term capital loss because you held onto the property for more than 2 years. The same logic will apply if you acquire equity and clear your position in 2 years. If the price at which you acquired the equity is more than the price at which you sold it, then you went through a capital loss.
On the other hand, if the price at which you sold was greater than the price at which you acquired it, then you received capital gains. Agar ek saal ke andar aapne apne equities bhej diye, toh jo loss or gain hua usse short-term loss ya short-term gain kahenge. Agar aapne apne equities ek saal Baad bheche to usse long term gain ya long term loss kaha jayega. The distinction is important, because short term losses and long term losses are settled, that is, offset, differently.
It is worth noting that certain assets turn into long term capital sooner than other assets. For example, agar aapne property khareed ke 1.5 sal mein bhej diya, toh usse short term capital Mana jayega. Immovable land becomes long term capital if you hold onto it for 2 years or more. Financial assets, on the other hand, like equities, become long term capital in 12 months flat. This is to be kept in mind when you are deciding which asset is the right investment option for you.
To answer the question raised by the topic of this podcast, no, you cannot use unrealized losses to offset taxes. Now we must clearly understand the two confusing terms in that sentence.
A) what are unrealized losses?
And B) What does it mean to offset taxes?
Chaliye unrealised losses ko bhi ek simple example ke sath samajte hai. Suppose you bought the shares of a company and ever since then, the company has gone down in value. Company ka market capitalisation kam hua hai, aur uska individual stock value bhi kam hua hai. This means that your holdings are less valuable than they were at the time you acquired them.
However, jab tak aap apni position clear nahin karte, tab tak aapke losses unrealized rahenge. Do you understand what that means? That means that unless and until you clear your position, and actually take on the loss, you cannot use your loss-making position to decrease your tax burden. But the moment you clear your position, and realise your loss, you can decrease your taxable income accordingly.
Suppose that you made losses up to 10,000 rupees on the equity markets. Now we can take that number - 10000 rupees - and subtract it from your gains in the equity markets in that year. Your capital gains will be taxed - however, you will be allowed to subtract your losses from your gains. This means that in a sense, you are only taxed for your net annual gains.
This is called offsetting realised losses from your taxable income. Do note that short term capital losses can be offset against both short term gains and long term gains. However, long term capital losses can only be offset against long term capital gains.
It is also possible to carry forward your losses for the next 8 years. That means that agar aapka bada loss hua hai, toh aap har saal apne loss ka kuchh chhota sa hissa apne taxable income se kam kar sakte hain. This ability to offset your losses makes the stock market less risky than people normally assume. Aapka bhale hi loss ho sakta hai, par agar aapka loss hota hai, toh aapka taxable burden bhi kam hoga.
Yah baat note kariye ki aap capital losses ko apne other income sources se kam nahin kar sakte. For example, you cannot decrease your taxable burden by subtracting your capital losses from your salary. Capital losses can only be offset against capital gains.
Let's end our discussion with an interesting practice that is quite popular among traders. Iss practice ka naam hai: tax loss harvesting. This is a good way to reduce your tax burden and retain the composition of your portfolio. Now you must be wondering: how can you retain the composition of the portfolio if you realise the losses and clear some of your positions? The portfolio will surely look different, right?
However, here's the trick. Maan lijiye ki aapke kuch positions loss mein hai. You can turn these unrealized losses into realised losses by clearing your position. The realized losses will help you decrease your tax liability. Once you do that, you can immediately use the money that you freed up to invest in very similar stocks. Matlab ki agar aap ne small cap FMCG stocks beche, to aap dusri small cap FMCG company ke hi stalks khareed sakte hai. Therefore, you will have the realised losses to decrease your tax burden, as well as maintain a roughly unchanged portfolio.
चलिए, एंजेल वन की तरफ से आपको आज के अलविदा. ये podcast शेयर करना ना भूलियेगा - याद रखियेगा की ज्ञान बाटने से बढ़ता है । और फिर अंत में तोह financial markets एक ऐसी university है जिसमे कोई professor नहीं, सब students ही है ।