This mechanism facilitates the offset of investment losses against taxable gains or income. For example, if an individual sells assets at a loss exceeding their capital gains for the year, the excess loss, up to a certain limit, can be used to reduce ordinary income. The remaining unused loss can then be carried forward to subsequent tax years, providing ongoing tax relief.
The ability to offset losses is crucial for mitigating the tax burden on investors. It recognizes that investment activities inherently involve risk and that losses are a natural part of the investment landscape. Historically, this provision was enacted to encourage investment and promote a more equitable tax system by acknowledging and addressing the potential for financial setbacks.
