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. 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.
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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.
What are the Best ASX Stocks to invest in right now?
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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!
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