Should you sell your underperforming assets by June 30?
With only days until the end of the financial year, it is a perfect time to look at your shares, managed funds and exchange traded funds to see if they have fallen in value since you bought them.
Whenever there is sharemarket volatility, there's an opportunity to harvest some capital losses to be used at tax time.
Tax-minded investors can take advantage of the losses to offset against any capital gains to reduce their capital gains tax for the year.
For anyone building a portfolio of investments, explains Peter Bembrick, tax partner at HLB Mann Judd, they might decide to cut their losses, sell their shares before June 30 and buy something else.
For example, some global funds have taken a hit as the S&P 500 has shredded 13% since the beginning of the year and the Hang Seng is down 25% over the past year.
Here's how it works for investors:
If you sell an investment for a $50,000 gain and lose $30,000 on another investment, your capital gain will be reduced to $20,000 and the capital gains tax will be based on the smaller amount.
A capital loss can't be offset against income from other sources, such as your salary.
You can carry a capital loss forward if you don't have a capital gain this year, says Bembrick. This allows you to deduct it from capital gains in later years. There are no rules as to how long you can carry the loss forward.
The timing is important, says Bembrick. You need a gain to use the losses. For example, if you have a loss in 2021-22 and a gain in 2022-23, you can use the loss next year as you can carry it forward.
But if you have a gain this year and a loss next year, you can't offset the gains this year.
Of course, you shouldn't be selling your investments primarily for tax reasons. It is only if you have been considering selling for some time that it is worth doing it before the end of the tax year.
You need to weigh up whether the falling price or your investment is due to a weak sharemarket, and it may well recover. Or if the managed fund is underperforming its peers over several years.
Get the 50% capital gains tax discount
Don't forget you need to hold your investment for 12 months or longer to qualify for the 50% CGT discount.
For example, Maria, an Australian resident, buys an exchange traded fund. She owns it for 18 months and sells it, making a profit of $10,000. She has no capital losses. Maria is entitled to the 50% CGT discount on the ETF. She will declare a capital gain of $5000 in her tax return.
As well Maria, bought some tech company shares for $10,000. Over 18 months they went down to $5500. She has a capital loss of $4500.
Note that capital losses must be offset against gross capital gains before claiming the 50% CGT discount.
Maria can offset her gross capital gain of $10,000 by subtracting the $4500 capital loss, i.e. a capital gain of $5500, and then apply the CGT discount reducing the net taxable capital gain to $2750. She will pay tax on this gain at her marginal income tax rate.
Cryptocurrencies and non-fungible tokens
The tax office is monitoring gains from cryptocurrency and non-fungible tokens (NFTs). It treats them the same way as gains from other investments, such as shares. If an investor buys, sells, swaps for fiat currency, or exchange one cryptocurrency for another, the tax office says it will be subject to capital gains tax (CGT) and must be reported.
Any losses from cryptos and NFTs can be used to offset any capital gains.
"The best tip to nail your cryptocurrency gains and losses is to keep accurate records including dates of transactions, the value in Australian dollars at the time of the transactions, what the transactions were for, and who the other party was, even if it's just their wallet address," says Tim Loh, assistant commissioner of the tax office.
Share and crypto traders
Share and crypto traders receive a different tax treatment than investors, explains Bembrick.
If share traders make a loss carrying on the business of share trading, it is a revenue loss. It is treated in the same way as any other losses from business. You can generally offset the loss against income, similar to negative gearing. For example, if you borrow money to buy and trade shares, you can claim the interest you are paying on the money.
To qualify as a share trader, you need to buy and sell high volumes of shares, holding them for short period. You need to keep your records to show the tax office that you qualify as a share trader.
Losses from collectibles
The tax office says capital losses from collectibles can only be deducted from capital gains made from collectibles. They cannot be deducted from gains made from other assets.
If you do not have a capital gain from another collectible, you can carry forward the capital loss to deduct it against a gain from a collectible in a future year.
Also worth noting is that a collectible isn't subject to CGT if you acquired it for $500 or less and so there's no capital gain or loss from the collectible.
Correction: An earlier version of this story contained an error in how the CGT discount was calculated in the example provided.
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