Can I Claim Short-Term Capital Loss by Selling and Buying Shares on the Same Day?

In the world of equity trading, tax implications often follow every investment decision. One frequently debated strategy among investors is whether short-term capital loss (STCL) can be claimed by selling a stock and then buying it back on the same day. While this move may appear to be a viable way to book a loss for tax purposes while still retaining ownership of the asset, Indian tax laws are more nuanced and require a deeper understanding of transaction intent and timing.

Understanding Short-Term Capital Loss

Short-term capital loss arises when a capital asset, such as shares or mutual funds, is sold within 12 months of acquisition at a price lower than its purchase price. Under the Income Tax Act, such a loss can be offset against short-term or long-term capital gains, thereby reducing overall tax liability. However, not every transaction that records a nominal loss qualifies as an STCL eligible for tax benefits.

Same-Day Sell and Buy: Does It Count?

Selling and repurchasing shares on the same day, often known as a "tax-loss harvesting strategy", may seem like a smart tactic to lock in losses. But the Income Tax Department is increasingly cautious about such maneuvers.

"Claiming capital loss requires a real and complete transfer of ownership," said Pallavi Joshi, a Mumbai-based tax consultant. "If the sale and repurchase happen on the same day, the net position remains unchanged, and it might be treated as a sham transaction intended solely for tax avoidance."

This means that if you're selling a stock at a loss and immediately buying it back on the same trading day, there's a risk the transaction may not be recognized as a valid STCL under scrutiny.

Wash Sale Rule in the Indian Context

While India doesn’t have an explicit "wash sale rule" like the United States (which disallows claiming a capital loss if the same or a substantially identical security is purchased within 30 days), tax officers here rely on "substance over form" and "intent of transaction" doctrines.

“Even without a formal wash sale provision, Indian tax authorities can disallow artificial loss booking if they perceive the transaction as lacking genuine economic substance,” added Joshi.

For example, if you sell 100 shares of a company at a loss at 10:30 AM and repurchase them at 11:00 AM, keeping your position intact, the authorities may challenge your intent, especially if this is done around the end of the financial year.

Delivery vs Intraday: A Key Differentiator

One crucial aspect to understand is the mode of transaction:

• Intraday trading is treated as speculative income and does not qualify for capital gains or losses. Therefore, any profit or loss from same-day squared-off trades falls under business income, not capital gains.

• Delivery-based trading, where shares are actually transferred to and from your demat account, is required for capital gain/loss accounting.

“If you buy and sell shares on the same day without taking delivery, the STCL argument doesn’t apply,” noted Rajeev Bhargava, a senior partner at a Delhi-based CA firm. “To claim a legitimate capital loss, the trade must be settled through delivery.”

Market-Wide Context: Why Tax Harvesting Is Popular

Tax-loss harvesting has gained attention, particularly during volatile phases in the equity market. With the Nifty and Sensex seeing wild swings in H1CY25, many investors are sitting on unrealized losses in specific small-cap and mid-cap counters.

“Retail investors often attempt to offset capital gains from popular IPOs or mutual fund redemptions by booking temporary losses in other scrips,” said Alok Sharma, Research Head at FinTech360. “However, these must be executed prudently. Same-day repurchases raise red flags.”

Tax experts advise a cooling-off period between sale and repurchase — ideally a few days or weeks — to lend credibility to the transaction.

What the Income Tax Act Says

Under Section 70 and Section 74 of the Income Tax Act, short-term capital losses can be adjusted against both short-term and long-term capital gains and carried forward for up to eight assessment years.

But, the act also mandates that the transaction must be genuine. While no clause strictly prohibits same-day sale and purchase, a lack of economic impact or change in ownership may trigger tax scrutiny.

Investor Outlook: Tread Cautiously

For retail investors, the key lies in transparency, documentation, and intent.

“If your goal is merely to reduce your tax burden without altering your portfolio, it’s likely to be questioned,” Sharma cautioned. “However, if your sale and repurchase are driven by strategic rebalancing or market timing, and supported with proper documentation, your STCL claim may hold up.”

Here are some best practices for investors:

• Avoid repurchasing on the same day. Wait for at least a few days.

• Maintain proper documentation including contract notes and demat statements.

• Consult a tax advisor before executing such transactions, especially near the end of the financial year.

While booking a short-term capital loss by selling and repurchasing shares on the same day might appear convenient, Indian tax laws stress on the genuineness of the transaction. The absence of a formal wash sale rule doesn’t guarantee immunity. It’s essential to ensure that your trade reflects a real economic impact, backed by intent and documentation. When in doubt, a short wait before re-entering the same stock can protect you from potential disallowance and tax notices.