Tax treatment of capital losses

Any property transfer, whether profitable or not, is subject to income tax on capital gain or loss. Although gratuitous transfers cannot generate capital losses, the calculation of the tax base of an unprofitable transfer may indicate that a capital loss has occurred in the transaction.

Since a tax base determines the income tax on capital gain or loss on the disposal of an asset, a positive result that derives from subtracting transfer value from acquisition cost will generate a capital gain; a negative outcome produces a capital loss.

As we explained in our article Calculation of Capital Gains Tax on onerous transfer of assets, asset transfer value is the higher of the value paid in the transaction or the market value of the right. For various reasons, the value of assets can increase or decrease over time, which affects both the market value and the price negotiated in a transaction.

For example: 

• Person A buys a laptop in 2021 for $1,000. 
• In one year, the computer depreciates by $500.  
• In 2022, A decides to sell the computer to person B, but B is unwilling to pay the original price for a used computer whose technology is outdated. 
• Since the market value of the computer in 2022 is $300, A agrees to sell it to B for $400. 
• In this case, the transfer value will be $400 (because it is the highest value) and subtracting $500 (acquisition cost less depreciation) produces a negative result. 

Since the tax base calculation does not result in a payable tax rate, the taxpayer will not have to pay taxes on the transaction. 

What to do in the event of a capital loss?

Despite not generating a tax payment obligation, capital losses grant the resident taxpayer the right to request the offset and deferral of such losses before the Tax Administration against capital gains generated in the same period or the following three tax periods. To use this right, the taxpayer must file an annual declaration to the Tax Administration under article 65 of the Regulations within three months after the end of the ordinary fiscal period.

The current regulation does not explain how to harmonize an annual return with the right to offset when the declaration is due and capital gains payable within the first five days of the month following the generating event. One way to comply with this requirement is to register the existence of a tax credit in the Tax Administration system, whose use for compensation is deferrable to the following three periods.

Having analyzed the tax treatment of onerous transfers that generate either capital gains or losses and the rights taxpayers can utilize to optimize the tax burden of their transactions, our next article will outline the tax treatment of free transfers.