As we finally arrived on the very last day of FY23, many investors have been selling down some of the ASX shares they hold. But why?

If you are early in your investing journey, we have curated some basic terms to grasp a clearer understanding of what might happen if you sell your shares around tax time.

What is tax loss selling?

Tax loss selling is the practice of investors selling off investments or assets near the end of the financial year to create capital losses that can be used to offset capital gains and lower their tax burden.

An ASX share sale could result in a gain or a loss. By selling investments at a loss, investors can generate capital losses that can be deducted from their capital gains, reducing the amount of tax they owe on their investment profits.

According to brokers, tax-loss selling tends to reach its peak in the first two weeks of June. This strategy is often advised by accountants and stockbrokers to help clients manage their tax liabilities. However, market observers have noticed that tax-loss selling has been starting earlier each year and has been influencing market activity since April.

According to the AFR, this shift may be attributed to investors who have made large profits from selling successful investments in resource and battery-related metals in recent years. As a result, they now face considerable capital gains tax liabilities.

Why would investors sell shares in June?

Here are some common reasons:

(1) Tax planning: by selling shares and realising capital losses before the end of the financial year (EOFY), investors can offset those losses against any capital gains they have made during the year. This strategy can help reduce their overall tax liability. Moreover, selling shares before the EOFY allows investors and companies to close out positions and align their portfolios with the reporting periods.

(2) Portfolio rebalancing: investors often rebalance their investment portfolios in June by selling shares that have performed well and reallocating funds to other investments with better potential returns or that are underperforming. This helps maintain a balanced portfolio and maximise their investment opportunities.Selling shares can also help them adjust their asset allocation, take profits, or reduce exposure to certain sectors or individual stocks.

(3) Window dressing: Institutional investors, such as mutual funds or pension funds, may engage in ‘window dressing’ at the end of the quarter or financial year. This involves selling underperforming stocks to improve the appearance of their portfolio’s performance in reports and statements provided to investors.

(4) Market seasonality: Some investors believe in market seasonality patterns, such as the “sell in May and go away” strategy. According to this belief, markets tend to underperform during the summer months, so investors may choose to sell shares in June to avoid potential market downturns.

Capital gain or loss?

If an investor is considering selling their ASX shares and has a significant unrealised gain, it might be worth delaying the sale until early July. That will also delay having to pay tax on the sale for another 12 months as July 2023 will be part of the FY24 tax year. A sale in June 2023 needs to be included in the FY23 tax return.

When selling shares, taxpayers need to determine if it resulted in a capital gain or loss by comparing the sale proceeds to the cost base, which includes the actual cost of shares and associated brokerage fees.

For example, if an investor purchased ASX shares for $1,000 and incurred $10 in brokerage fees, and later sold the shares for $2,000 after 13 months, with an additional $10 in brokerage fees, their cost base would be $1,020 ($1,000 + $10 + $10). This would result in a capital gain of $980.

Capital losses can be used to offset other capital gains from share sales. However, it is important to note that engaging in wash selling, where shares are sold at a loss solely for the purpose of harvesting capital losses and repurchasing the same investment, is not allowed by the Australian Taxation Office (ATO) which has advanced data-matching capabilities. When an investment is sold, the ATO will be aware of it and expects taxpayers to accurately report the capital gain or loss in the appropriate section of their tax return.

What if we generate a profit from investments in ASX shares?

The next step is to look at whether there are capital losses to utilise (including capital losses brought forward from previous tax years). Any capital gains are offset against losses. Any remaining capital gains from the sale of ASX shares held for over 12 months can benefit from a 50% Capital Gain Tax (CGT) discount, as per the ATO.

For example, if a $980 capital gain is made after 13 months, it is halved to $490. This reduced capital gain, along with any other applicable gains and losses, is added to the taxpayer’s taxable income in their annual tax return. If there are unused losses in a particular year, they can be carried forward indefinitely to offset future capital gains.

However, it’s important to note that capital losses cannot be offset against regular income such as wages or dividends.

Things to keep in mind

While buying shares is straightforward, selling them can have tax implications, particularly related to capital gains tax. It is important to carefully consider whether selling is the appropriate choice. In addition, capital gains tax involves various factors that might be complicated for those who are not familiar with taxation law, therefore seeking assistance from a tax accountant might be worth considering.