Tax loss selling for Australian investors
The below article is for informational purposes only and does not constitute a product recommendation, or taxation or financial advice and should not be relied upon as such. 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:
- What is tax loss selling?
- A tax loss selling example
- How to model tax loss selling opportunities with Sharesight
- Avoiding wash sales
What is tax loss selling?
Simply put, 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.
Notes on tax loss selling
Although many investors leverage tax loss selling toward the end of the year, you may harvest tax losses at any time.
Higher tax rates apply for investments you’ve held for a year or less (short-term capital gains), than for investments you’ve sold after holding them for longer than a year.
The amount of money you can save in taxes through tax loss selling depends on your tax rate (individual/trust, SMSF, or company).
A tax loss selling example
To help explain how tax loss selling works, let’s look at an example:
Let’s say you were lucky enough to buy CSL (ASX: CSL) back in 2012 when it was trading at $32. It’s currently sitting at $202.42, so you’ve incurred a total annualised return of 76.57%.
However you have taken a big loss on formerly high-flying Retail Food Group (ASX: RFG), which you bought at $4.42 back in 2014, but is now only worth $0.16– a total loss of -12.01%.
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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 15% 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:
- Displaying the CGT position for all your holdings which are not yet sold (if they were sold on the date of the report) broken down into:
- Short term capital gains (unrealised)
- Long term capital gains (unrealised)
- Capital losses (unrealised)
- Modelling the capital gains tax that would arise across your portfolio if the shares identified were sold on the report date.
- Allowing you to modify the CGT sale allocation method at the overall portfolio or individual holding level to determine your optimum position.
The report uses the ‘discount method’ for shares that have been held for more than 1 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.
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.”
Save even more by claiming your Sharesight subscription as a tax deduction
Selling a share for a loss is never an easy decision, but at least by realising that capital loss event before the end of the financial year, you can offset some of your capital gains and minimise your CGT. And as an Australian tax resident, you can save even more by claiming your Sharesight subscription fees on your tax return1. Sign up today to optimise your tax position, plus get everything you need to run your tax reports and gain unparalleled insights into your portfolio performance throughout the year.
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1 If you derive income from the sharemarket, your Sharesight subscription may be tax deductible. Check with your accountant for details. If you wish to claim your Sharesight subscription on this year’s tax return, you must upgrade and request your invoice by 26 June, and your invoice must be paid by 30 June.