Can someone explain ato's 'wash sale' to me in laymans terms? effectively a strategy that gives you zero Capital Gains Tax.
Apparently ATO recognise that and will penalise you if
I dont get it. If we made a cap loss, its a cap loss.. it negated our cap gain (as it should), why would they penalise us?
info: https://www.ato.gov.au/law/view/document?docid=TPA/TA20087/N…
What i dont get is, so what if we deliberately create loss to avoid tax? the fact remains, I made zero profit for the year because my loss offset my $62,000 gain. Why should i be penalised?
lets say I didnt use the strategy, i end up paying tax on the $62000 gain (Option 1)
Lets say I did use the strategy, i pay $0 cap gain tax this year. If share rise $62000 next year, I end up paying tax on the $62000 gain (Option 2).
Option 1 and 2 results to the same thing.
Then again the shares may stay at the same value and you would have paid $0 capital gains tax whilst still owning the stock (Option 3). What's really happened in the tax mans eyes is that the losses have been brought forward before they are realised.
Hmm. I'm not expert but
Lets say I did use the strategy, i pay $0 cap gain tax this year. If share rise $62000 next year, I end up paying tax on the $62000 gain (Option 2).
Would you ? Or you will continue to use the wash sale method next year to never pay any capital gain tax. Not saying you would, but if it's legal. You can.
even if I did, the only benefit i get is a delayed payment in cap gains tax. I will need to eventually pay it. So is this telling me that this policy by ato is aimed at people delaying cap gain tax because of time value of tax money that ato is missing out?
@Thenarrator: I'd say so yeah. If the current policy isn't in place, technically I can delay paying capital gain until the day I die.
@tomleonhart: well no, its only when you have a loss.. no one would deliberately make a loss to offset cap gain
@Thenarrator: but technically you can delay paying capital gain permanently is it not ? It is still a method that enables people to abuse it.
Whether or not you want or able to do it is another matter.
The current policy would prevent that from happening.
I don't see the issues. Heaps of people dump assets on June 30 to make a capital loss on it. Thing is ur buying back at low price so u will just get done when selling if makes a gain.
IMHO this shouldn't be illegal.
exactly, it works out the same at the end. What we're doing is only realising the gains (or losses) early for that year. In long term, it is exactly the same thing. Is this strategy used on the basis of time value of tax money?
Unfortunately it seen as tax avoidance (not ok) rather than tax minimisation (ok)
I think this is minimisation. We're not avoiding tax because we will eventually need to pay it because by buying back into the stock, our position in the stock is still active and we're subject to tax (if it raises).
Selling an asset one day and buying it back the next day to create a capital loss or minimise capital gains was known as 'bed and breakfasting' in the UK and was certainly legal at one time - not sure if it still is. However in Australia the ATO certainly frown upon this behaviour and you need to leave a reasonable amount of time between the two transactions. Of course in this time the pricing of the relevant asset may move against you.
Yep pretty sure if you've made a capital gain of $1000 already as an example and you sell some shares and make a capital loss of $0 you would not have a $0 capital gain, you can then buy the shares back the next financial year.
Think you'll be right as long as you don't re-purchase the same shares pretty much straight after you sell them. Just give it a few weeks/months before re-purchasing.
yeah but im trying to figure out ato's logic behind this policy. what are they trying to achieve?
a lot of times, there's no logic/reasonableness from a layman's point of view, they just want to tax anything and everything to maximise their tax revenue.
I think they are keen that you pay the tax now as opposed to later.
But depending on how the market moves, you may not pay any tax later at all. So why pay tax now if you don't have to.
Yes i agree. That is possibly the only reason i can think of. Seems such an overkill and so much penalisation just so ato can earn that small bit of interest not to mention that this policy is "assuming" we are trying to do a dodgy the whole time. Selling and buying instanteously is a general assumption.
If you sell and then buy after the end of the financial year you may pay no tax which means less tax from the ATO, so of course they want you to pay as much tax as possible
In the US, the rule is your capital loss will be disallowed as an offset against any capital gains if you buy back the asset within 30 days. In the UK, as has been pointed out, it is similarly against the rules.
In Australia, it seems there is no hard and fast time limit. Rather this falls under the general tax avoidance principles. So the ATO will look at the whole sequence of events to determine if the predominant purpose of your actions was to avoid tax. If it finds this is the case, then the loss is disallowed.
It seems fair enough to me. You are being penalised because the primary purpose of your actions is to avoid tax, not a legitimate sale.
Its a dumb rule and there is no way for the ATO to police it.
all you have to say is
you sold 1000 shares of ABC on 29 June 2016 because you
a) thought they were relatively overvalued.
b) needed the money to buy a car
you bought 1000 shares of ABC on 2 July 2016 because
a) they are not overvalued anymore
b) decided not to buy a car so you could reinvest the monies.
I think the example in the link explains it well. The only reason for the sale and immediate buy back was to create a loss to avoid tax on the other capital gain. There was no intention to divest from the investment.
Also if the price increased after buy back it would have to be held for 12 months before selling to get the 50% discount on any capital gains.