A strategy for investors who own shares that have decreased in value might be to sell them resulting in the capital loss being crystalised and used to offset future gains in their tax returns.
However, what if you wanted to retain the shares and crystallise the loss? Is this possible? What if you sold the shares and bought them back immediately?
It is likely the tax office will view this kind of activity as a “wash sale”.
What is a Wash Sale?
The Tax office define a wash sale as “an arrangement under which a taxpayer disposes of a capital asset where in substance there is no significant change in the economic exposure to the asset, or in other words where that exposure or interest may be reinstated by the taxpayer, to apply a capital loss or allowable deduction against a capital gain or assessable income already derived or expected to be derived”.
Essentially a wash sale may occur when an asset is sold and repurchased leaving the taxpayer in a similar economic situation but an improvement in their tax position through the addition of a capital loss. Selling shares at a loss on 30 June and then buying the same parcel again on 1 July is an obvious example of a wash sale.
Penalties for Undertaking a Wash Sale.
If the tax office determine that you have undertaken a wash sale the capital loss will be rejected. This means that not only will you have made a loss on the shares, but you will also lose the ability to offset that loss against any future gains.
Should Investors Fear the Wash Sale Rules?
It is important to note that the Tax office does not specify a timeframe between selling the asset and repurchasing, instead they will look at the overall circumstances and the intention behind the investor’s actions.
Therefore, if you are not selling and buying shares for the sole intention of reducing tax you shouldn’t fear accidently undertaking a wash sale, as the sale and repurchase of shares within a short period may be due to rational investing based on market changes.
If you are unsure about whether your market activity may be considered a wash sale you can find multiple examples on the Taxation Ruling TR 2008/1 or you can always consult a registered tax agent.
Related blogs:
https://www.faj.com.au/tax-treatment-of-crypto-trading/
Author: Matthew Prawirohardjo
Email: matthewp@faj.com.au
