Tax loss selling made easy

NOTE: There is a newer version of this article. See Tax loss selling for Australian investors for more information.

Disclaimer: 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.

As we come to the end of the financial year (in Australia, at least), investors’ thoughts inevitably turn to tax. In particular, in a year like this one where you have probably seen some decent rises in your portfolio it can be a good time to harvest some gains while minimising your tax.

As Marcus Padley put it in Cuffelinks (now Firstlinks) back in 2015:

We are coming into the end of the financial year. This is a good time to assess your capital gains tax situation for the year so far and work out if you have a net capital gain from stocks sold. If so, you should also be looking through the portfolio for any stocks with losses attached that you could sell and crystallise a loss to offset paying any tax on the gains.

You know the stocks, those crappy little holdings you didn’t sell when it was obvious you should sell. Those stocks that you shut your eyes to and hoped against hope they would rebound miraculously... but they kept falling. Those stocks. Those small illiquid cock-ups that shout "Idiot, idiot!" every time you see them in your 'portfolio'. All those short term trades that became long term 'investments'. Yes them... the crap.
Marcus Padley, Making the most of tax loss selling

So how do you implement this process? By tax loss selling (also known as "tax harvesting") assets with capital losses in order to lower or eliminate the capital gains realised by other investments. And in Sharesight it’s easy to do, thanks to the Unrealised CGT Report. This report shows the CGT position for all your holdings which are not yet sold. It breaks the gains into short and long term and also shows your losses as well.

Let’s take a hypothetical example. Suppose you were prescient enough to buy Xero (ASX: XRO) back in 2010 when it was selling at $1.72 and now want to cash in your tremendous gain as it now sells around $25. You are sitting on a profit of $130,000. You are also sitting on a big loss of $60,000 in formerly high-flying Slater and Gordon (ASX: SGH). You have been sitting on it in the hope that it will some day bounce back. Well if you sell both stocks in the same year you will be able to offset about half the gain in your Xero stock with the SGH sale. That may soften the blow of the loss -- and encourage you to move on to new investing horizons!

It’s a good idea to run the report throughout the year, not just at the end, in order to see where you are and to start thinking about opportunities to pair off gains and losses throughout the year.

One note of caution

Let’s say that despite the hammering you have taken on SGH you think it is now super cheap and poised for a return to greatness. You sell SGH to realise the loss and then buy it back again to position for the rebound. This is known as a "Wash Sale" and the ATO takes a very dim view of this. They will disallow the loss if the sole intention of the sale was to minimise tax. So 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! Here is a recent article on the topic.

Save even more by claiming your subscription

While the Unrealised CGT Report is available exclusively to upgraded Sharesight plan holders, in most cases, Australian tax residents can claim next year’s subscription fee on this year’s tax return by upgrading to a paid plan before 30 June¹. And as a bonus, when you pre-pay for an annual subscription, you get 1 month free.

FURTHER READING

• 5 ways to get the portfolio insights you need at EOFY
• How your broker’s performance numbers mislead you
• How to interpret the P/E ratio