Tax Loss Harvesting for Stock Traders

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Sakshi Shah

income from trading
Income Tax

Tax Loss Harvesting is the practice of selling your loss-making shares and mutual funds before the end of the financial year by converting these unrealised losses into realised loss. It helps reduce the tax liability.

What is Tax Loss Harvesting?

Let us understand how Tax Loss Harvesting works from this example:

If the trader wants to hold the stock, he can buy the stock again so that the portfolio remains unchanged. Generally, when looked at the difference, a trader would prefer to incur the transaction cost of entering into these transactions rather than paying higher taxes.

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Example

Below is a snapshot of the P&L Statement of a trader as on 28.03.2020. The tab refers to short term equity trades.

Tax Loss Harvesting - P&L Statement

Before Tax Loss Harvesting

Realised Profit Rs. 3,85,000
Unrealised Loss Rs. 1,27,500
Total Income Rs. 3,85,000
Tax Liability Rs. 20,250
[15% of Rs. 1,35,000 (385000-250000)]

After Tax Loss Harvesting

The trader can sell 300 shares of Crest and 250 shares of Deepakfert to realise the loss of Rs.1,27,500

Realized Profit Rs. 3,85,000
Realized Loss Rs. 1,27,500
Total Income Rs. 2,57,500
Loss set off against Profit
Tax Liability Rs. 1,125
[15% of Rs. 7,500 (257500-250000)]

The trader can thus reduce the tax liability by doing Tax Loss Harvesting. Additionally, if the trader wants to keep the portfolio unchanged, he/she can buy 300 shares of Crest and 250 shares of Deepakfert again.

Taxation on Trading Income

The trader who plans to practice Tax Loss Harvesting should be able to calculate the income tax on trading income and the applicable tax rates. Based on the calculation of tax liability, the trader can decide whether to opt for it or not. The trader should analyse whether converting unrealised loss to realised loss will result in a reduction in taxes or not.

Income from trading in equity shares or mutual funds may be considered as a Capital Gains Income or as Non-Speculative Business Income. This is based on the nature of trading.

Not sure how your trading income is treated for tax?
Read our article here to understand how Sale of Share can be classified into Capital Gains or Business Income.
Read More
Not sure how your trading income is treated for tax?
Read our article here to understand how Sale of Share can be classified into Capital Gains or Business Income.
Read More

Below are the applicable tax rates:

A. Trading Income considered as Capital Gains

  Equity Shares & Equity Mutual Funds Debt Mutual Funds and other Securities
LTCG 10% in excess of Rs. 1 lac 20% with the benefit of indexation
STCG 15% slab rates

B. Trading Income considered as Non-Speculative Business Income

An opportunity for Tax Loss Harvesting is available in case of trading in equity delivery and mutual funds. It is not available in the case of equity intraday, equity F&O, commodity trading, and currency trading since the position is squared off on the same day (intraday) and on last Thursday of the month (F&O).


Rules for Set-Off

The trader who plans to practice Tax Loss Harvesting should be able to analyse which loss can be set off against which profits as per the set-off rules of Income Tax Act. However, the decision whether to convert the unrealised loss to realised loss should be made after analysing against which incomes can this loss be set-off. Therefore, if the loss cannot be set off against any existing profits, then the trader should not opt for it.

Equity Trading Income considered as Capital Gains:

Equity Trading Income considered as Non-Speculative Business Income:

Note: Trader having Salary Income cannot set off Non-Speculative Business Loss against such income. Thus, if there are no other incomes except Salary, the trader should not go for Tax Loss Harvesting.

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FAQs

I have a Realised Short Term Profit of Rs. 3,00,000. However, there is an Unrealised Long Term Loss of Rs. 1,00,000. Should I opt for Tax Loss Harvesting by selling the shares to realize the loss?

If you opt for Tax Loss Harvesting by selling the shares held for more than a year, it would be a Realised Long Term Capital Loss (LTCL). Additionally, LTCL cannot be set off against STCG (Short Term Capital Gain). Thus, in this case, Tax Loss Harvesting is not beneficial.

I want to opt for Tax Loss Harvesting to save tax but I still want to hold the stock. What should I do?

A trader can opt for Tax Loss Harvesting by selling the existing holdings on which there is an Unrealised Loss. Thus, the loss can be adjusted with realised profit to reduce the tax liability. However, if the trader wants to continue holding the stock to keep the portfolio unchanged, you can buy the shares again on the next trading day. However, you must ensure that the transaction cost of entering into buy and sell transaction is less than the amount of taxes saved from Tax Loss Harvesting.

I have an unrealised loss from Equity Trading Income. But I also have a Salary Income. Will Tax Loss Harvesting help me save taxes?

The loss from equity trading cannot be adjusted with Salary Income. Thus, the trader should not opt for it since it would not reduce the tax liability.

  • s sinha says:

    I have LTCG and STCG both for selling SBI Bond series N5 during FY 2020-21, wherein STT was not paid.
    How LTCG and LTCG would be taxed?

  • s sinha says:

    I have LTCG and STCG both for selling SBI Bond series N5 during FY 2020-21, wherein STT was not paid.How LTCG and LTCG would be taxed?

    • Sakshi Shah says:

      Tax treatment of Bonds:
      STCG – taxed at slab rates
      LTCG – 10% without indexation or 20% with indexation, whichever is lower

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