Allowable Capital Loss

What is an Allowable Capital Loss?

An allowable capital loss occurs when the selling price of an asset is less than its purchase price. The difference represents a financial loss for the owner. Both individuals and corporate entities can utilize allowable capital losses to reduce their tax liabilities by offsetting them against capital gains obtained from other transactions.

Key Points:

• Offsetting Gains: Allowable capital losses can be used to offset capital gains, thereby reducing the taxable amount.
• Tax Regulations: Since 1994, indexation (adjusting for inflation) is no longer allowed to create or increase a capital loss.
• Applications: Both individuals and businesses can claim these losses on their tax filings.

Examples

1. Individual Investment: Jane bought shares in a company for $10,000. A few years later, she sold these shares for $6,000. The allowable capital loss here is $4,000 ($10,000 - $6,000). Jane can use this loss to offset any capital gains she has from other investments, potentially lowering her overall tax liability.
2. Corporate Asset Disposal: A corporation acquires a piece of equipment for $50,000 but later sells it for $30,000. The corporation experiences an allowable capital loss of $20,000 ($50,000 - $30,000), which can offset potential capital gains recorded elsewhere.

Frequently Asked Questions (FAQs)

1. How can allowable capital losses impact my tax bill?

Allowable capital losses can reduce your taxable income by offsetting any capital gains you have acquired in the same fiscal year. If the loss exceeds the gain, the remaining loss can often be carried forward to future years.

2. Can allowable capital losses be carried forward?

Yes, if your allowable capital losses exceed your capital gains in a given tax year, many tax jurisdictions allow you to carry forward the remaining loss to offset future capital gains.

3. Are there any restrictions on what type of assets can generate allowable capital losses?

Yes, not all assets are eligible for generating allowable capital losses. Typically, personal assets or primary residence sales are excluded; thus, capital losses are usually relevant to investment property or business assets.

4. Is indexation relief available for allowable capital losses?

No, indexation relief, which adjusts for inflation, has not been permitted to create or increase capital losses since 1994.

5. Can allowable capital losses be set against income?

Generally, allowable capital losses can only be set against capital gains, not against ordinary income.

Related Terms

1. Capital Gains: The profit from the sale of an asset or investment. Capital gains are subject to capital gains tax.
2. Indexation: A former tax provision allowing adjustments to an asset’s cost base for inflation, ended in 1994.
3. Tax Liability: The total amount of tax that an individual or entity is obligated to pay to the tax authorities.

Online Resources

1. IRS Publication 544: A comprehensive guide on sales and other dispositions of assets.
2. Capital Gains and Losses on Investopedia: An overview of capital gains and losses, including examples and tax implications.

Suggested Books for Further Studies

1. “Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes” by Tom Wheelwright - A practical guide on understanding taxation and maximizing wealth.
2. “J.K. Lasser’s Your Income Tax 2023” by J.K. Lasser - A thorough exploration of various tax principles, including capital gains and losses.
3. “The Tax Law of Unrelated Business for Nonprofit Organizations” by Bertrand M. Harding Jr. - Though focused on nonprofits, this book covers essential tax principles applicable to various entities.

Accounting Basics: Allowable Capital Loss Fundamentals Quiz

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