Capital Gains Tax on Stocks: Here’s what you need to know

Investors may be liable to pay Capital Gains Tax on Stocks, but may not know the nuances of how it works. So for the sake of such investors, we thought we’d write up a brief guide about how it works and what investors need to know.

Please note that the content in this article is general advice only, and we recommend investors do further research of their own, starting with resources on the ATO’s website and potentially obtaining personal financial advice (i.e. from a qualified licensed financial adviser) if needed.

Do you need to pay Capital Gains Tax on Stocks?

If you make a capital gain on a stock, then it is extremely likely. Strictly speaking, it is not technically a distinct tax, but rather it is the inclusion of any capital gain in your ordinary income for income tax purposes. But it may push you across an income tax threshold you otherwise would not have been.

There may be some exceptions or concessions such as shares bought before September 1986 when CGT was introduced and certain early-stage innovation companies eligible for concessions.

How do you make a capital gain on stocks?

You make a capital gain if you sell a stock for more than you buy it for. That’s a simplistic definition, although certain costs (i.e. brokerage) can be deducted from your income. If you sell a stock for less than you buy it for, you’ve made a capital loss. You do not need to sell all your shares at once to be liable to pay tax on them.

It is important to note as well that your sale (or original purchase) doesn’t need to be your own consensual trade. You could sell as part of a stock buyback, or buy as part of a dividend reinvestment plan. You could be ‘bought out’ kicking and screaming due to a takeover offer than the rest of the shareholders approved.

You could have inherited the shares from deceased relatives or a relationship breakup without paying a cent for the shares. In such cases, it is complicated but what may occur is that your liability might only be assessed from when the shares became yours.

What happens with capital losses?

You don’t get ‘money back’, but you can use it to offset capital gains and thus capital gains tax. Let’s say you invest in 2 companies in a year and sell one for a $1000 profit and sell another for a $500 loss. You can use the latter to offset your liability for the profit, and make your net capital gain only $500. But, you won’t get a $500 refund for the loss.

What about the 50% discount?

Since 1999, investors have been able to reduce their CGT liability by 50% if (and only if) they’ve held CGT-subject assets for more than a year. The whole logic of having a discount was to compensate for the impact of inflation and reflect actual, realised gains. But prior to 1999, it was a kind of formula (similar to depreciation but in reverse) that adjusted the cost base of assets for inflation. The 50% discount is no doubt simpler. Whether or not it is equitable and maybe the discount should be lower…that’s certainly up for debate, but not in this article.

Conclusion

CGT is one of the most important taxes to be aware of if you are investing in shares. If you part ways with shares for more than you picked them up for, you’ll need to declare them to the ATO. It is important to be aware of this liability before you even invest in shares, and it may even influence your investing behaviour.

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