Tuesday, April 7, 2009

CONVERT SHORT TERM LOSSES INTO PROFIT

One of the biggest drawbacks of stock trading or investing is the short term loss that one may have out of this. This causes lot of grief and pain to all of us. But, do you know that there are provisions in the accounting principles which allow us to convert these short term losses into profits? Sounds impossible ? Read on ..

According to provisions, you are allowed to offset short-term capital losses against short term or long-term capital gains not just for this financial year, but for up to eight consecutive years.

This means that if you book short-term capital losses before March 31, you can not only reduce tax incidence for the year on capital gains income but also save on capital gains, if any, you acquire over the next eight financial years. For starters, short-term capital assets is one which is held for not more than 36 months immediately prior to the date of transfer.

There are, however, exceptions. In case of shares, securities units of UTI, specified mutual funds and zero coupon bonds, if they are held for not more than 12 months, they would be considered as short-term capital assets.

Whats the logic ?-Logic is simple: you can always buyback these assets at the same price you sold them in the market. And since you bought them again, any gain or loss arising out of these assets would be treated as short-term for 12 or 36 months, depending on the nature of the asset.
For instance, suppose you have Rs 10 lakh as capital gain from the property and you are holding shares/mutual units which are at a loss (short-term ) of Rs 12 lakh on March 30, 2008.
Then, it’s advisable to sell the shares and buyback the same day.
In this process, loss will be booked from the income-tax point of view and capital gains arising out of property will be exempt.

What should you do to use this law? - Your first step should be to ensure that all income, expenses, profits and losses relating to this financial year are appropriately determined and captured by way of documentation in order to be assessed accordingly.Once done, if you have made profits on certain assets (as a result of which you are liable to pay tax), then you must evaluate the performance of your short-term assets .

If these assets are, in any case, not likely to fetch a profit in the foreseeable future, then you must dispose them and book losses to set off such losses against the gains computed from the sale of other capital assets.

Hope this has given you a new perspective towards short term losses.

Stay wise n stay wealthy...

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