Tax implications of investing in stocks and how to slash your bill

The tax implications of investing in stocks are not often considered when you first start investing, although you may get a nasty shock later on. To avoid it, we thought we’d write about what the tax collectors want from investors, and how you might be able to avoid them.

This is general advice only, we are not tax agents or accountants, although we are long-term investors at Stocks Down Under and have used these strategies before.

We’ve also encountered investors left with a shock at tax time – given the lack of withholding, they are left owing money they might not have at the bank, and often wondering what they could have done differently had they been aware of the implications. And so here is a basic guide. It is no substitute for professional financial advice for your specific situation, but it will hopefully be a starting point.

The tax implications of investing in stocks

The main implication is potentially paying tax on capital gains and dividends.

Capital gains taxes

Simply put, you will need to pay taxes on any capital gains you make in stocks. Investors have to calculate all capital gains made from all asset classes and include any such capital gains in their separate tax income. Although many will use the term ‘Capital Gains Tax’ or CGT, it is not technically a separate tax to regular income tax. It is just a term used because capital gains were not specifically included as assessable income prior to 1986. Any shares bought prior to 1986 are CGT-exempt assets, although it is unlikely many people reading this article will have held specific shares for so long. Well done to any who have.

What about capital losses? You cannot claim them back as a tax refund, but you can use them to offset capital gains – in other words, reduce taxes you pay on gains. After calculating all your capital gains and losses, you get a ‘net capital gain’ and that is the figure you include in your assessable income and you pay tax on your income as per the income tax rates. Capital losses are the best way to reduce taxes on stocks, although not the only way. One is to use deductions to offset your income, although for most investors the only realistic deduction will be brokerage fees and they will only make a difference if you’re a prolific trader.

Dividend taxes

If you are paid a dividend by a company you’re invested in, you may be liable to include it in your income tax return. Unless…they are franked.

You see, dividends given to shareholders is generally a profit on which tax has already been paid, and this may be double taxation in such a case. So investors in those companies get ‘franking credits’ and can use. them to offset the amount they’d have to pay in income tax.

How much exactly? That specifically depends on how much of the dividend is franked, this varies from company to company.

Any other taxes?

If you invest in overseas shares, then you may be liable to pay taxes there too. We won’t comment on specific taxes in other countries, but what about paying tax back home? You have to declare the income made, but you may be able to offset tax if you have paid tax on those shares overseas.

Once upon a time, stamp duty was payable on investors buying shares, although this is no longer the case.

Conclusion

It is easy to be ignorant of tax implications of stock investing, although you cannot be. Investors need to be aware that they may be liable to pay tax on capital gains and dividends received, although there are ways of reducing the final bill, all within the scope of the law. By using these strategies, investors can avoid a nasty shock come tax time, being asked for money they may not necessarily have in the bank.

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