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How do you offset capital gains losses?

By June 21, 2023October 5th, 2023FinGlobal

How do you offset capital gains losses?

June 21, 2023

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Capital gains tax is a subject that we’ve covered frequently in our blogs. We’ve discussed who needs to pay capital gains tax, we’ve covered when it must be paid and we’ve looked at the capital gains tax exclusions and ways to minimise capital gains tax on your emigration. What we haven’t covered is the subject of capital gains losses and how these must be handled on your income tax return to the South African Revenue Service.

What is a capital gain loss?

A capital gain loss is the difference between the purchase price of an asset and its sale price, where the sale price is lower than the purchase price. For example, if you buy a stock for ZAR100 and sell it for ZAR90, you would have a capital loss of ZAR10.

Can capital gain losses be offset?

A locally derived assessed loss can be reduced by a taxable capital gain. ‘Taxable income’ refers to the total amount obtained by subtracting all allowable deductions and offsets from a person’s income, as well as any amounts that must be included in or deemed to be included in their taxable income. This definition indicates that taxable income can have a negative value.

However, a taxable capital gain cannot be offset against a foreign assessed loss or against the remaining balance of a foreign assessed loss that has been carried forward from the previous year. Furthermore, an assessed capital loss incurred during a specific tax year cannot be used to reduce an individual’s regular revenue-based income. It neither decreases their taxable income nor increases their assessed loss related to revenue. Instead, such an assessed capital loss is pinned and can only be offset against capital gains in future tax years.

There are a few ways to offset capital gains losses in South Africa:

  1. Offsetting against other capital gains: You can offset capital gains losses against other capital gains that you have made in the same year. This will reduce the amount of tax that you have to pay on your total capital gains.
  2. Carrying forward losses: If you have more capital gains losses than capital gains, you can carry the losses forward to offset future capital gains. This means that you can reduce the amount of tax that you have to pay on your future capital gains.
  3. Reinvesting: You can also offset capital gains losses by reinvesting the proceeds from the sale of an asset that has made a loss. This will allow you to crystallise the loss for the purpose of offsetting future capital gains.

It is important to note that there are a number of restrictions on how capital gains losses can be offset. For example, as mentioned, you cannot offset capital gains losses against ordinary income.

The annual exclusion for capital gains tax

It is essential for taxpayers to be able to accurately apply the capital gains tax annual exclusion contained in the Eighth Schedule of the Income Tax Act, especially in relation to capital losses. This is important for individuals to correctly complete their IT12 income tax returns and for the purposes of correctly preparing for tax planning for the following tax year.

Why is capital gain/loss important?

Individual taxpayers must generally calculate gains or losses when disposing of assets, including investments, properties, and interests in private companies or close corporations, with a few exceptions. These gains or losses are determined by subtracting the base cost from the proceeds and then combined to determine the potential tax liability that arises from the disposal.

Aggregate capital gain or loss: how does the annual exclusion work?

To determine the aggregate capital gain or loss for a given year, the annual exclusion is applied in a two-step process.

  1. All capital gains for the year are reduced by any capital losses incurred during the tax year. This means tallying all gains and losses realised throughout the year to arrive at a net total.
  2. The net amount obtained – whether a gain or loss – is further reduced by the annual exclusion of R40,000. It is important to note that the annual exclusion applies equally to reduce both capital gains and losses.

However, it is important to note that the annual exclusion does not accumulate or carry forward unused portions for use in future years. Furthermore, it applies only to gains and losses in the current tax year. As such if the aggregated gain or loss is less than R40,000 in the current tax year, the disposal of assets in that year will have no impact on your current or future assessments. Regardless, you will still need to declare this information on your income tax return.

Can the annual capital gains exclusion be applied to previous tax years?

Contrary to popular belief, the annual exclusion cannot be used to reduce an individual’s assessed capital loss from previous tax years. Only after establishing the aggregate gain or loss can capital losses from previous years be taken into consideration.

Net capital gains or assessed losses: what you need to know

To determine the net capital gain or assessed capital loss, any assessed capital losses from previous tax years must be subtracted from the aggregate capital gain or added to the aggregate capital losses, as the case may be. If there is still a net gain after deducting previous losses, this amount is included in your taxable income at a rate of 40%, which is referred to as the taxable capital gain. On the other hand, if the aggregate capital loss of the current year is increased by losses from previous years, the assessed capital loss can then be carried forward to offset future capital gains.

If all of this is confusing, fret not as the correct application of the annual exclusion is integrated into the eFiling system for individuals. It is, however, important to understand the application of the exclusion to accurately plan your exposure to capital gains in future years.

FinGlobal: tax specialists for South African expats

Capital gain or capital loss? Either way, it can be a headache with a capital ‘H’ if you’re not properly prepared for it. That’s where FinGlobal can help. We’re here to make sure that all your bases are covered, that all tax angles and implications have been considered and we do everything in our power to ensure that your tax liability is properly managed and minimised.

To see how we can be of assistance with streamlining your tax affairs, leave us your contact details and we’ll be in touch shortly.

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