Sharp fall in the equity markets has led to investors facing a loss-making situation. As in good times, when there was quite a bit of planning done on the tax impact of capital gains that the investors earned, now too there is a need to take a careful look at the entire position and impact of the capital loss. This is important to understand the situation they face and find a way to move forward.
Nature of losses
There are two kinds of losses that can occur. They are short-term capital loss and long term capital loss. If an investor sells a share at a price lower than what he had bought it at, then a loss will be recorded.
As long as the investor does not sell the share, then there is no loss, even though the share price might be lower than the purchase price. The tax liability is fixed only when the sale takes place. If the share has been held for a period of less than a year then the loss will be classified as a short-term capital loss. A holding period of 12 months or more will make the loss a long-term capital loss.
Long-term capital loss
When it comes to shares that are sold through the stock exchange, there is a shock waiting for investors.
If they make a loss, that is a long-term capital loss, then there is nothing that the investors can do about it in terms of setting this off against some other gain. This is because the long-term capital gains is tax free in the hands of the investor and hence there is no benefit available to a long-term capital loss. In such a situation there is nothing that the investor can do except take his money on the sale and use it further elsewhere.
Short-term capital loss
There is some relief present when it comes to a short-term capital loss. This is because the short-term loss can be set off against some other gain but since they are being taxed only on their short-term gains it is viable only against this option.
In this position it might make sense for the investor to actually ensure that some of their short-term gains have some set off against it so that there is no tax that they have to pay.