The correct answer is: C. Loss on shares held as stock in trade
A capital loss is a loss on the sale or exchange of a capital asset. A capital asset is an asset that is not held for sale in the ordinary course of business. Shares held as stock in trade are considered capital assets.
A loss due to bad debts is a business expense. A loss of stock due to fire is a casualty loss. A loss of a machine due to theft is a casualty loss.
A casualty loss is a loss of property due to an event that is sudden, unexpected, and unusual. Casualty losses can be caused by fire, theft, vandalism, or other events.
Business expenses are expenses that are incurred in the ordinary course of business. Business expenses can be deducted from gross income to arrive at taxable income.
Capital losses can be deducted from capital gains to arrive at net capital gain. Net capital gain can be taxed at a lower rate than ordinary income.