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Reader Comments: Cannot Offset Long-term Capital Losses

Thanks very much for all your comments on the earlier post about the Direct Tax Code keeping equity gains tax free till Mar 2011. I’d then asked if losses would be grandfathered – i.e. should we book them before and carry them over. Reader Sirka Pyaaz says:

If you held a share for more than one year and sell it in the open market, the capital gains are exempt. So the law says ‘hey, im not taxing you on the gains, so im not gonna let you take the benefit of accumulating your losses’. Which is fair enough. This means both profits AND losses will be out of the picture. To overcome this, sell your stocks for a loss in an offmarket transaction. In that case, gains are taxable so losses will be allowed.

This seems to be consensus. But reader PX points out that the taxman won’t be very happy allowing an “off-market” transaction designed just to avoid tax, even if it’s a legal loophole. Remember that since this year, anything of the sort created to avoid tax, with no other intention, is likely to be disallowed just on that basis.

Best perhaps to wait for the final DTC draft. Still, excellent conversation, thanks.

  • Sirka Pyaaz says:

    >Thanks for including my comment in your post 🙂

    I don't think the taxman has the power to tell you how to sell your stocks. It is perfectly legal to sell your shares off the market. It is perfectly legal to say that you don't want an exemption when it is inconvenient for you.

    So you have two options if your stock is currently in the red:

    1. Gift it to a relative? But here's the deal. Capital Gains/losses are profits/losses that arise when you "transfer" assets to someone else. Under Income Tax Act, a gift is NOT considered a transfer. So you CANNOT book a capital loss. But this, again, doesn't apply to shares that you got through ESOP, so you can gift those shares and book losses. (I know, the Income Tax Act is full of twists and turns. Don't expect the new DTC to improve anything)

    2. Find someone who will buy the shares off market and sell it to him/her at a rate not below the lowest price of the stock for that day. This is the best option. Just tell your broker to find someone, it shouldn't be much of a hassle. For a buyer, it doesn't really matter if he buys it from the market or off the market. (I don't know if you still have to pay brokerage though)

    Now you can book the capital loss and carry it forward for 8 years.

    I'm still studying, so I may have missed a trick or two. Please clarify if there's something wrong with my reasoning.

  • Px says:

    >Then again
    govts are always hypocritical and selfish and unjust..
    take for example UTI64, the govt disallowed booking profits just to avoid the barrage of capital losses on us64.
    To avoid tax ranbaxys promoters sold their shares in a market trade.. was it not objectionable?
    i have a heck of a cap loss on infy long term which cost me 9500 ps (not counting bonuses)so im serious.

    so things are sketchy and people who do it better have all documents of purchase/sale to sufficiently prove the transaction.

    i think one can do an offmkt sale to people not directly related to them and it is not a quid pro quo thing giving the shares are pref listed eq shares and not Z or dabba shares, and the transaction is genuine.

    one can also do it off mkt after rematting shares so ito cannot object but one has to preplan .

    if everyone/enmasse books losses, the govt/ito/cit etc cant really object.

  • Px says:

    >Ps it aint really fair for people holding shares since 2000 and before which cap losses and gains were taxable

  • Anonymous says:

    >I have done many off market deals which have been allowed by IT people.

    In one case I just preserved the Economic Times Stock quotes for that day just to show to IT people.

    In another case, I requested my broker to give me sale and buy receipt for me and my relative and I/He made bank transfers via broker's account.

    IT people accepted this.


  • Deepak Shenoy says:

    >Traderji: I have also done off market deals and paid cap gains (eg. Ranbaxy). But in this case, if you do it specifically to offset cap gains taxes (i.e. sell and buy back and claim cap losses) they may allow a few, but if it becomes prominent, chances are they won't allow it anymore because it has no economic value other than to avoid tax. (if you sell and don't buy back, that might be ok)

  • Anonymous says:

    >Deepak: I would respecfully disagree with you. If you buy back for dividend stripping, there are definite IT penalty, but for BTST or STBT it is well within the law.


  • mkd says:

    >Regarding off-market txn, isnt there some clause that the current "Stock specific" Short-term & Long-term gain rates apply only if STT is paid. i.e. Txn is done through exchanges.