What Is Capital Loss?
Capital Loss occurs when assets like stocks, mutual funds, property, or business assets are sold for a price lower than the acquisition cost. It is a monetary loss that can be used to offset tax by balancing capital gains.
How To Calculate Capital Loss?
The capital loss can be calculated by using the below formulae,
Capital Loss = Purchase Price − Selling Price
Accounting For Capital Losses
- In Personal Finance: Utilized for tax deductions by balancing capital gains.
- In Business Accounting: Shown as a loss in financial records.
- Short-term Capital Loss: From assets less than 1 year.
- Long-term Capital Loss: From assets that are more significant than 1 year.
Advantages Of Recognizing Capital Losses
- Tax Advantages: Reduces taxable income and offsets capital gains.
- Portfolio Rebalancing: Allows investors to sell performing assets.
- Loss Carryforward: Unused losses can be carried forward to subsequent tax years.
- Improved Financial Planning: Enables businesses and individuals to maximise tax liabilities.
Key Takeaways
A capital loss occurs when a property is sold at a price lower than its purchase price. It may be short-term or long-term and can be used to counterbalance capital gains to yield tax advantages. Capital losses help reduce taxable income, optimise investment portfolios, and maximise financial planning. Businesses and individuals can even use unused losses to advance upcoming years of taxation for better tax management.