Shares, options, cryptocurrencies and NFT’s are widely among the most popular investment for Australian’s today aiming to capitalize on emerging market trends and the historic downturn caused by the Coronavirus pandemic. However, selling investments can negatively impact your tax position without careful consideration. Capital Gains Tax, fees, and negative hits to a person’s taxable income can be significant. With that in mind, some of the more common consequences are discussed below.
Selling investments like shares is relatively straightforward at the core of things. You elect that you no longer want to hold the share and communicate to your broker that you want to sell that share. Generally, unless slippage occurs, the share sells at this price. A simple, straightforward event that takes no more than two minutes, can however wreak havoc on your tax position if not considered and unless an individual is actively trading, they may not be aware of the assessable gains, offset losses, and some of the common complications that can occur. Everything from a blockchain split to a dividend reinvestment plan has significant implications from a taxation standpoint, and without careful planning an individual can find themselves in the Australian Taxation Office’s sights.
Selling Investments and Capital Gains Tax
To some people, these might be among the three most ominous words in the English language. Every dollar you earn as profit on a capital event (difference between sale price and purchase cost) is accounted for as a taxable amount, and for individuals this taxable amount equals to your current tax bracket rate. The consequences of this are obvious, that you will likely have a payable amount due from a Capital Gains Tax event, such as the sale of any equities or securities. There are capital gains tax discounts available when investments are held for longer than 12 months and it is important to check if you have any prior year capital losses carried forward, as this will also reduce any tax payable.
Impacts on Assessable Income
If you produce a cryptocurrency within the year, new legislation presented by the Australian Taxation Office now deems the production of such an item to be held as income, regardless on whether you converted the item to a tangible currency. This can artificially raise an individual’s income and can generate a deficit of tax paid to the ATO. Furthermore, the eventual sale of such a created item triggers a CGT event, taxing the individuals on the sale of the created item.
The income you receive is determined for cryptocurrency to be the price at the exact time of creation and will have a cost base of that trading price. For example, if I was to forge a new BTC, the carrying cost base would simply equal the trading value at the time of creation.
Foreign Exchange Trading (FOREX)
Though not strictly a share, you will find foreign exchanges make up a large portion of any brokerage platform and will be the most volatile of any category of equity by a large margin.
Simply exchanging one currency for another through a bank or broker is a perfectly hassle-free way of exchanging money through legitimate means and holds no CGT implications. Adversely, attempting to increase gains through the changing market of one currency to another is viewed by the ATO as exactly the same as engaging in any other share trading. This will form a CGT event on any gains (or losses) you incur.
Options provide the right not to buy and sell shares, but the right to speculate on the future market and exercise calls and puts on a particular stock. Generally held as a crucible for the veterans of trading or those looking to leverage smaller amounts of money into large momentum swing trades, these Options are held in the same regard for all share events, with expired Options being a CGT loss, and any gain forming a CGT Event.
Although any CGT gain is an assessable income type for an individual (after all relevant deductions), a CGT loss is only applicable as a deduction to CGT gains. This forms a core anti-avoidance measure in use by the ATO that prevents an individual from reducing their taxable income to zero by utilizing any losses that may have built up over several years. Although there are rules to apply capital losses against assessable income, these are strongly barred from a usual taxpayer without conducting their trading in a “businesslike manner”.
If you are planning to sell your investments, it is first important to understand the taxation implications of doing so and ensure you are adequately prepared before reinvesting proceeds into your next venture.