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Tax loss selling for Australian investors

by Angela Thompson, Sharesight
Disclaimer: The below article is for informational purposes only and does not constitute a specific product recommendation, or taxation or financial advice and should not be relied upon as such. While we use reasonable endeavours to keep the information up-to-date, we make no representation that any information is accurate or up-to-date. If you choose to make use of the content in this article, you do so at your own risk. To the extent permitted by law, we do not assume any responsibility or liability arising from or connected with your use or reliance on the content on our site. Please check with your adviser or accountant to obtain the correct advice for your situation.

Tax loss selling is a strategy that investors can leverage to minimise their net capital gains during a financial year for tax purposes. While tax loss selling can be used at any time, it is most often implemented in the lead up to the end of each financial year. This makes June a particularly good time to review your investment portfolio and decide whether to leverage a tax loss selling strategy to help offset any capital gains you incurred for the year.

This article will cover:

Tax loss selling for Australian investors

What is tax loss selling?

Tax loss selling (or tax loss harvesting) involves selling investments that have incurred capital losses in order to “net out” or offset capital gains realised during the year. Essentially, if you wish to sell out of certain unprofitable investments in your portfolio, you may choose to use tax loss selling as a way to alleviate some of that loss and re-align your portfolio with your investing strategy, even if the net effect is still negative.

While many investors choose to leverage tax loss selling towards the end of the financial year, you can harvest losses at any time. The amount of money you save in taxes will differ depending on your tax rate (individual/trust, SMSF, company), but it should be noted that higher tax rates will apply for investments you’ve held for less than a year (short-term capital gains) than investments you’ve sold after holding them for more than a year.

How does tax loss selling work?

To help explain how tax loss selling works, let’s look at an example calculation:

Let’s say you were lucky enough to buy CSL (ASX: CSL) back at the beginning of 2012 when it was trading at $32. It’s currently sitting at around $272, so you’ve incurred a total annualised return of around 23%.

However you have taken a big loss on formerly high-flying Retail Food Group (ASX: RFG), which you bought at $4.60 back in 2014, but is now only worth $0.056 per share.

HoldingPurchase ValueMarket ValueCapital Gain
ASX: CSL$10,016$81,906.88$71,890.88
ASX: RFG$10,000.40-$6,695.27-$3305.13

While you could hold onto RFG in the hopes that it will someday bounce back, another option is to sell both RFG and CSL before the end of the year to offset some of the gain in your CSL stock with the RFG sale. Doing so may not only soften the blow of the loss, but also encourage you to move on to new opportunities next year.

How to model tax loss selling opportunities with Sharesight

If you hold investments that have suffered losses this year, Sharesight’s Unrealised CGT Report can help you calculate how to offset your capital gains by:

  1. Displaying the CGT position for all your current holdings, if you were to sell them on the date of the report. These are broken down into:
    • Short term capital gains (unrealised)
    • Long term capital gains (unrealised)
    • Capital losses (unrealised)
  2. Modelling the CGTthat would occur across your portfolio if the shares identified were sold on the report date.
  3. Allowing you to modify the CGT sale allocation method at the overall portfolio or individual holding level to determine your optimum position.

Unrealised CGT tax loss selling Sharesight Sharesight’s Unrealised CGT Report makes it easy for investors to model different tax loss selling scenarios.

Unrealised CGT Report Summary

The report uses the ‘discount method’ for shares that have been held for more than one year and the ‘other method’ for shares held for less than one year. The discount rate is based on the tax settings of an Australian portfolio:

  • Individuals / Trust – CGT discount of 50 %
  • Self Managed Super Fund – CGT discount of 33⅓ %
  • Company – CGT discount of nil

The report also allows you to specify the sale allocation method at the overall portfolio and individual holding level to determine your optimum position, including:

  • First In, First Out (FIFO) – Sharesight assumes that you sell your longest held shares first.
  • Last In, First Out (LIFO) – Sharesight assumes that you sell your most recently purchased shares first.
  • Maximise Gain – Sharesight assumes that you sell shares with the lowest purchase price first.
  • Minimise Gain – Sharesight assumes that you sell shares with the highest purchase price first.
  • Minimise CGT – Sharesight assumes that you sell shares that will result in the lowest capital gains tax first. This method is more sophisticated than the ‘Minimise capital gain’ method because it takes into account the Australian CGT discounting rules.

Unrealised CGT Report Sale allocation methods

Notes on the Unrealised CGT Report

  • The Unrealised CGT report is designed for forecasting purposes only. Refer to the Capital Gains Tax Report to calculate your actual (realised) taxable capital gain income for a specific period.
  • You may carry forward losses from the previous reporting period by clicking on the ‘Advanced Options’ link.
  • It’s a good idea to run the report throughout the year, not just at the end, in order to stay on top of opportunities to offset gains and losses throughout the year. You may want to share secure portfolio access with your accountant and/or adviser, so they can keep this in mind as well.
  • The Unrealised CGT Report is available on Australian Investor and Expert plans.
  • For more information, visit the Unrealised CGT Report help page.

Avoiding wash sales

In 2008, the Australian Tax Office (ATO) issued issued tax ruling TR 2008/1, which specifically outlaws arrangements where “…in substance there is no significant change in the taxpayer’s economic exposure to, or interest in, the asset, or where that exposure or interest may be reinstated by the taxpayer”.

In other words, the ATO prevents investors from selling a stock in one financial year to take advantage of a capital loss event, only to buy that stock again in the new financial year. This is known as a “wash sale” and the ATO will disallow the loss if the sole intention of the sale was to minimise tax. As Sharesight Executive Director Andrew Bird said, “if you are going to sell, make sure you really mean it. If you still believe in that stock then choose a different ‘loser’ to sell to offset your gain.”

Offsetting your capital gains webinar

In this webinar, Sharesight CEO, Doug Morris explains tax loss selling and how investors can calculate capital gains tax offset opportunities with Sharesight’s Unrealised Capital Gains Tax Report.

Embedded content: https://www.youtube.com/embed/Tl_Zl59Qs9w

Calculate tax loss selling opportunities with Sharesight

Join thousands of Australian investors already using Sharesight to track their investment portfolios and optimise their CGT position by signing up today. With Sharesight you can:

Sign up for a FREE Sharesight account and get started tracking your investment performance (and tax) today.

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