How to treat share trading losses

Most people know how sale of listed equity shares is taxed. Short-term gains are taxed at 15%, while long-term gains are exempt. But the tricky part is how to report intra-day stock trading? Some taxpayers do not report to these transactions in their tax return, especially when they have losses. What is the tax treatment, let’s find out.

Separate out investments from trading activity

Your investments or activity in the stock market may involve various forms. As a first step, it is important to classify your activity in to various buckets. Consider these:

  • Intra-day stock trading activity
  • Investments in equity shares (held for the longer term) or mutual fund investments
  • Futures and options (derivatives) transactions

All of these have different tax treatment. Investments held for the longer term are treated as capital assets and capital gains tax rules apply. But the Income-tax Act treats intra-day trades and F&O activity as a business. Even when you are a salaried employee, any gains (or losses) from these must be reported as a business in your tax return. This puts off a lot of taxpayers.

Some have never reported a business and are worried about how to proceed with their tax returns. The detailed ITR-4 form must be filed for reporting a business. There are several tax benefits of treating intra-day trades as a business. Business losses also come with tax benefits, so it helps to go the extra mile and report them. The income tax department receives reports of stock activity of taxpayers from financial institutions. So, do remember to report these in your tax return, or else you may receive a tax notice for non-compliance.

Reporting intra-day trades as a business

Reporting your stock trading as a business lets you claim expenses from your receipts. Put together all the expenses that have been spent to earn this business income. It may include, broker’s commission, a portion of your phone bills, internet cost, demat account charges. If you have employed a person to help you, you can deduct his/her salary. Or if you are using a consultant, or attending investor workshops those can be claimed too.

You must calculate income-related to each of your trading activity separately. Income from F&O trades should be calculated separately from intra-day stock trading activity. If you have significant delivery-based stock market transactions, where the intent is to not stay invested for the longer term, treat that as a business too, and calculate its income separately. You can use a reasonable ratio to allocate expenses to these different businesses. You can take time spent by you on each type of trade as a ratio or another reasonable basis. These incomes (losses) are calculated separately, since the tax treatment is different for them.

How to treat losses

Reporting business losses can lower your taxable income. The Income Tax Act allows business losses to be set off from other incomes. However, these are some rules you must know:

  • Losses from speculative business can only be set off from speculative income
  • Losses from non-speculative business can be set off from other sources of income such as salary, rental income or interest income
  • Any intra-day trading is treated as a speculative business. So, you can only set it off from intra-day trading income.
  • Any losses which cannot be adjusted in the same year are carried forward and can be claimed against speculative income in the succeeding four years. However, you must file your tax return to be able to do so.

The income tax department has specified that F&O trades shall be considered as a non-speculative business. Its losses can be carried forward for eight years.

This article was published in The Financial Express on 23 August 2016.

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