ACCA Taxation (F6) Practice Exam

How should current year capital losses be treated?

1. They cannot be used

2. They should be used to offset future gains

3. They should be set off against current year capital gains

4. They are only applicable for businesses

The correct answer is: They should be set off against current year capital gains

When dealing with current year capital losses, they must first be set off against any capital gains incurred in the same year. This is a fundamental principle in taxation, as the principle aims to allow taxpayers to reduce their taxable capital gains by the amount of their capital losses within the same period. If capital gains exist in the current year, this treatment ensures that the tax liability reflects the taxpayer's actual net gain or loss. If there are no taxable capital gains in the current year, then the treatment of those losses can shift to future periods, where they may potentially offset future capital gains. However, the immediate and necessary step is to first utilize capital losses against current year gains, which is fundamental in calculating net capital gain for that year. This method of treating capital losses is not limited to businesses; individuals too can utilize their capital losses to offset their gains, making the incorrect alternatives misdirected regarding the rules governing capital loss treatment in taxation.