Imagine you’ve sold shares you held for over three years at a loss, but made a quick profit on another stock sold within a year — can that long-term capital loss wipes out your short-term gain? Many investors assume any loss can reduce any gain, but is that really how the tax rules work? Before you file, it’s worth asking: are there hidden limits on how these offsets apply, and could you be missing out on smarter tax planning?
The Income Tax Act allows taxpayers to adjust capital losses against capital gains to reduce tax liability.
Specifically, a long-term capital loss can be set off only against long-term capital gains, not short-term ones.
However, short-term capital losses can be set off against both short-term and long-term capital gains. This distinction is crucial for effective tax planning and compliance.
But this arises 3 very important questions:
- If you incur a long-term capital loss this year, can you offset it against a short-term capital gain from last year?
- Can short-term capital losses be carried forward if there is no gain in the same year?
- Is it allowed to adjust long-term capital losses against short-term capital gains to reduce tax liability immediately?
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