Tax loss selling: Should you do it before the end of FY25?

It’s that time of the year when investors engage in tax loss selling. If you clicked on this article, you’re probably wondering whether or not you should do it. Alternatively, you may be wondering which stocks to avoid until the tick over to FY26.

While we cannot give individual advice on which shares to sell here, we can provide some general principals to help you make up your own mind.

What is tax loss selling?

Tax loss selling is a taxation strategy that involves the sale of investments at a loss. It can also be referred to as “harvesting losses” or “tax-loss harvesting.” The strategy typically involves selling stocks, bonds, mutual funds, or other investments that have lost value during the year in order to offset capital gains.

You cannot claim a tax loss as a tax deduction, but you can use it to reduce the amount you pay on your capital gains. You have to file all capital gains and losses in your tax return and derive a ‘net capital gain/loss’ taking into account all CGT events. The losses you make reduce the amount you pay on the gains.

Should I consider tax loss selling?

Before deciding to sell shares just to take a tax loss, it is important to consider the potential implications of such a move. Tax loss selling can be an effective strategy for reducing your tax burden, however, it also has some possible drawbacks. If done improperly, the strategy could wind up costing you more in taxes than you would have otherwise paid. Additionally, selling shares just to take a tax loss may involve incurring capital gains taxes if the investment was profitable in prior years and is sold at a loss.

Also keep in mind that capital losses can only be used to offset capital gains for the year and any remaining amount can only be used to offset up to $3,000 of income. Furthermore, if your losses exceed your total taxable income for that year, the additional losses can be carried forward and used in future years but cannot be carried back before that year.

Therefore, it is important to discuss this strategy with a financial planner or tax professional before making any decisions as they will be best equipped to help you determine whether or not this move would make sense for your particular situation and overall financial goals.

Our suggested golden rule

Without giving individual advice, we think investors considering selling shares should ask themselves the following question: Is there definitely a near-term catalyst that will all but certainly lead to an upswing in the stock? If no, then investors may want to get out. If yes, investors may consider staying in. But the catalyst has to be realistic and within a 6-12 month horizon. You don’t want to still be stuck in a loss as you are now.

If you want to stay in, we recommend investors set a stop loss to minimise any further losses. In fact, if investors are not already, we recommend they adopt stop losses for all their investments. It is better to be in the position where you don’t even have to think about tax-loss selling, having no losses to absorb!

What stocks might be hit by tax loss selling?

Well, any stocks underwater obviously! That is to say, stocks with a share price lower than the start of the year. But at particular risk would be companies that have fallen due to circumstances investors may not have seen coming (like reputational hits or poor financial results), particularly if they occured many months ago and shares still have not recovered.

Some stocks that might be impacted include:

• Mineral Resources (ASX:MIN) which has been hit by low battery metal commodity prices and high costs at its new Onslow iron ore mine;
• Johns Lyng (ASX:JLG) which copped a reputational hit back in September when it was named in an ABC investigation into the strata industry;
• Bellevue Gold (ASX:BLG) that is seeing a gold mine not producing as much as it expected and it essentially bet badly on where gold prices would go through hedging contracts;
• Monash IVF (ASX:MVF) which accidentally impregnated a client with someone else’s embryo, a fact that only came to light when the birth parents asked to transfer their remaining embryos to another provider;
• Spark (ASX:SPK) which is suffering from New Zealand being is in the worst economic downturn since the 1990s recession, and
• Dominos (ASX:DMP) which is suffering from a case of…same old, same old.

Of course, others will be impacted too – that is not an exhaustive list.

The $3m super tax may make tax loss selling more extreme

Like it or loathe it, the $3m super tax will likely be coming during the current term of government. But even in the absence of legislation or certainty that the Greens will accept a higher threshold and non-indexation to help Labor pass it, super funds are restructuring to avoid their liability. This may well mean selling stocks with huge losses to offset any gains (whether realised or on paper). Watch this space – not just this year, but in years to come.

Conclusion

Plenty of stocks will be sold off in the month of June as investors take their tax losses off the table. Whether or not any such companies will bounce back in FY26 is up for debate, but there’s no harm that can be done by waiting until after July 1 in and of itself, but harm that could be done by getting in now.

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