Definition
Capital Loss (allowable capital loss) is the excess of the cost of an asset over the proceeds received on its disposal. Both individuals and companies may set capital losses against capital gains to establish tax liability. Since 1994, indexation is no longer permitted to create or increase a capital loss.
Types/Categories of Capital Loss
- Short-term Capital Loss: Arises from assets held for one year or less.
- Long-term Capital Loss: Results from assets held for more than one year.
- Realized Capital Loss: Loss recognized after an asset has been sold.
- Unrealized Capital Loss: Potential loss on an asset that has not been sold.
Calculating Capital Loss
$$ \text{Capital Loss} = \text{Purchase Price of Asset} - \text{Selling Price of Asset} $$
Example Calculation
- Purchase Price of Stock: $5000
- Selling Price of Stock: $3000
- Capital Loss: $5000 - $3000 = $2000
Importance
Understanding capital losses is essential for effective tax planning and financial management, helping individuals and companies to reduce tax liabilities.
Applicability
- Individual Investors: Can offset capital losses against capital gains, reducing overall taxable income.
- Corporations: Utilize capital loss carryforwards to minimize tax liabilities in profitable years.
- Capital Gain: Profit from the sale of an asset.
- Tax Deduction: A reduction in taxable income.
- Indexation: Adjusting for inflation in tax calculations.