Capital Loss or Income Loss - better or same tax outcome?

Let's assume we have a student at university with no income. Is it better to claim a capital loss or an income loss from a tax point of view? If someone makes a capital gain, if the asset is held over a year then there's a 50% discount. Does this affect anything for claiming the capital loss? Eg. 1st year capital loss is written down on the tax return to be claimed for future years. Then year 2 there is a capital gain of an asset held over 1 year which gets 50% discount.

On the other hand is it better if it was an income loss. Eg. that asset was disposed of $1 so it doesn't become a capital loss. Which then can be claimed in the future against future income. The only problem is if that person next year earns less than $20,500 or so then it could end up being a waste.

 

Sometimes an income loss is worse. The student might earn a small amount of income that would otherwise be tax free as it is under the tax free threshold - but the tax free income is absorbed against the prior year loss effectively wasting it.

So yes you are correct - it depends.

 

You generally don't have a choice. But I would rather a capital loss as this could be carried forward to offset future capital gains.

 

Tax law would apply and consider whether the matter is a CGT loss or a income loss. Actually the key terms are whether the item in on capital account or revenue account. Its not necessarily a choice. Tax law contains a interesting rule of sorts. Its rare to see it used but when it is used it can help address double taxation.

This law permits a taxpayer who has a matter that is both a CGT event and also income to avoid double taxation BUT they may be required to treat the matter as revenue account rather than capital account. Its not a choice of which !! . Why is this so ? You need to consider that taxpayer INCOME includes the net capital gain. So capital account is a element of income and not additional to it.

Tax Determination TD 2011/21 contains a example