How to Claim a Capital Loss Against Capital Gains on Your Tax Return
5 rules to follow to offset losses with gains
A taxpayer must follow 5 basic rules when adjusting capital losses to capital gains. The five rules are:
a) The loss from an exempt source should be set off against the exempt income only.
b) There is intra-head adjustment and inter-head adjustment between the different heads of income. Intra-head tuning should be done first, then inter-head tuning. Intra-heading adjustment means that if the taxpayer has suffered a loss from one source under a particular heading, he is allowed to deduct it against income from another source under the same heading. For example, if you have 3 houses and one of them suffers a loss, this loss can be deducted from the income of the other 2 houses (such as rental income). Inter-heading adjustment involves offsetting the losses of one income head (eg, business income) against another income head (eg, capital gains).
c) Unabsorbed depreciation in business and profession is completely different from business loss or any other loss.
d) Loss from speculative activity (e.g. intraday trading in shares) cannot be compensated by any income other than speculative income,
e) No loss can be deducted from income from lottery winnings, racing including horse racing, card games and any other gambling, gambling, crypto income, etc.
Types of losses incurred by taxpayers
Usually, an individual taxpayer faces two types of losses in calculating his income. One is the loss of real estate and the other is the capital loss from the sale of assets. Loss of ownership of the house can be compensated by any other head up to Rs 2 lakh. The remaining loss can be carried forward for the next 8 years to be deducted from the income from the ownership of the house only in future years.
However, the rules regarding capital loss are not that simple. Loss under this head cannot be set off against income under any head (such as wages, other sources, etc.) other than capital gains income. Depending on how long the asset has been held, capital gains can be of two types: long-term capital gains (LTCG) and short-term capital gains (STCG). The long-term capital loss should be set off only against income from long-term capital gains. However, the short-term capital loss can be set off against income from long-term capital gains as well as short-term capital gains. In a word, the long absorbs the short.
It is possible that the full amount of the capital loss will not be absorbed to be offset in a loss year. This happens when the amount of the loss exceeds the winnings. In this case, this loss can be carried forward over the following 8 tax years. However, the loss carried forward can only be adjusted with income from capital gains.
Things to keep in mind when claiming compensation
It is very important to keep 3 things in mind while claiming compensation for carried forward losses. First, the year in which such a loss is incurred should be double-checked to see if it falls within the 8-year limit from the reference year of the loss incurred. Second, if the amount of the loss was reduced in the valuations in either year and that adjustment became final. And third, whether the base year return was filed by the ITR filing due date for a particular class of taxpayers.
In the event that you have been subjected to income tax investigations such as research and investigation and as a result of this your undisclosed income is detected, no loss of any kind cannot be attributed to this undisclosed income.
How to request compensation in the ITR form
One is required to report such gains and losses in the ITR and claim compensation. This must be declared in the Annex – CG of the ITR form.
Once you know the different sources of income, you will need to select the correct applicable ITR form. A person is required to provide the information in the capital gains/losses columns for the calculation. The details you need to enter are the total value of the consideration (sale price), date of sale, cost of acquisition and date of acquisition and any other relevant details/expenses if applicable.
If you are claiming a deduction (for example, Section 54 deductions) on capital gains, you must also enter the relevant details. It is important to provide the correct details and then double check and confirm those details before submitting the ITR. It is advisable to calculate the revenues and losses in the main work before feeding the information into the ITR forms.
(The author is a former IRS officer and founder of Taxbuddy.com)