# Tax question on capital gains vs. losses



## rustyheela (23 June 2007)

could anyone briefly explain how this works ie

hypothetically if u have a capital gain of $1500 and a capital loss of $1500 is the net result $0.00 or does the the loss be deucted from the payable tax on the gain ie

gain $1500, @ 30% tax rate = $450 tax payable minus the $1500 loss?

                                                                      thanx from a newbie


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## springhill (23 June 2007)

*Re: Tax question on capital gains vs losses*

Don't quote me on this but my understanding ur $1500 loss is also susceptible to the 30% tax rate, but dont forget to claim your brokerage fees as a tax deduction (presumably also at 30%). If i am wrong i would also like to know as this is my first year posting a share win/loss


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## GreatPig (23 June 2007)

*Re: Tax question on capital gains vs losses*

Capital losses are deducted from capital gains before any tax considerations.

So $1500 of each would give a net gain of zero and thus no tax.

GP


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## reece55 (23 June 2007)

*Re: Tax question on capital gains vs losses*



GreatPig said:


> Capital losses are deducted from capital gains before any tax considerations.
> 
> So $1500 of each would give a net gain of zero and thus no tax.
> 
> GP




GP's is on the mark......

The only additional thing I would note is that if you are an investor and hold your shares on a capital account, if you end up having a net capital loss for the year, they will be quarantined for future years capital profits......

If you are a trader and hold shares on a revenue account, totally different ball game.....

This is not advice, yada yada yada yada......

Cheers


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## Broadside (23 June 2007)

*Re: Tax question on capital gains vs losses*



GreatPig said:


> Capital losses are deducted from capital gains before any tax considerations.
> 
> So $1500 of each would give a net gain of zero and thus no tax.
> 
> GP




you're right....I have a question, since assessable capital gain halves if stock held for more than a year, does the same principle also apply to a loss?

eg bought $5000 2005
sold $4000 2007

is the loss applied against gains $1000 or $500?  hypothetical question but I do have a couple of stale losses I am sitting on.  Thanks.


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## GreatPig (23 June 2007)

*Re: Tax question on capital gains vs losses*

Capital losses are offset against capital gains before any consideration of the 50% discount. However, you can choose which gains you offset the losses against to your best advantage, meaning against gains on stocks held less than 12 months rather than longer.

At least this is my understanding. Check with your accountant.

Cheers,
GP


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## Mofra (24 June 2007)

*Re: Tax question on capital gains vs losses*

Following on from this question;

If you are classified as a trader, is it right to assume any capital losses will be offset against any appreciation in your holdings (revenue based holding, not subject to CGT)?


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## GreatPig (24 June 2007)

*Re: Tax question on capital gains vs losses*

To the best of my understanding...

Traders don't have capital gains or capital losses. It's all treated as income and revenue losses. All income (profits from gains, dividends, bank interest, etc) is added together and then all losses (losses on sales, brokerage, bank fees, and all other deductions) are subtracted to get a net taxable income.

That's then combined with change in trading stock value, depending on how you calculate that, to determine amount of tax.

GP


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## Mofra (24 June 2007)

*Re: Tax question on capital gains vs losses*



GreatPig said:


> That's then combined with change in trading stock value, depending on how you calculate that, to determine amount of tax.
> 
> GP



Cheers GP, that's the info I was hoping to clarify.

Many thanks


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## Snagglepuss (25 June 2007)

*Re: Tax question on capital gains vs losses*

OK, here's my understanding ... I'm not a tax expert, but have spent some time going through this stuff with my accountants.



GreatPig said:


> Capital losses are offset against capital gains before any consideration of the 50% discount.




True.



> However, you can choose which gains you offset the losses against to your best advantage, meaning against gains on stocks held less than 12 months rather than longer.




Not true ... or, more precisely, not relevant. All realized profits and losses are netted off against each other before the 50% discount is applied (as stated above). So when you think about it, it doesn't really make any sense to "choose" which gains are offset against which losses - everything is simply netted off together. (Perhaps, GP, you are getting confused with the ability to choose which purchase a sell trade can be matched with?)

There are a couple of "wrinkles" with the 50% capital gains tax discount which I have never seen mentioned on a forum (and I haven't been able to find a good explanation of them on the ATO site either).  They go like this:

*Scenario 1*

Suppose we closed only three investments during the tax year, with the following profits and losses:

Stock A: Profit of $10,000, held for over 1 year
Stock B: Profit of $6,000, held for less than 1 year
Stock C: Loss of $4,000
We must net our gains and losses first, before considering the CGT discount. So, our net capital gain for the year is $10,000 + $6,000 - $4,000 = $12,000. Now we apply the discount. We have $10,000 of "long term" capital gain, and _half_ of that amount (i.e. $5,000) can be used to reduce the amount of profit which is taxable. In this case, the taxable gain is therefore $12,000 - $5,000 = $7,000. (Note that we do not simply _halve_ the net capital gain figure of $12,000!)

Also, note that the holding period of a loss-making investment is irrelevant; a capital loss is simply offset against capital gains (or it can be carried forward to future years if there are no capital gains in the current year).​
*Scenario 2*

Now, again suppose we closed three trades during the tax year, but with a greater loss on stock C:

Stock A: Profit of $10,000, held for over 1 year
Stock B: Profit of $6,000, held for less than 1 year
Stock C: Loss of $8,000
Now, the net capital gain for the year is $10,000 + $6,000 - $8,000 = $8,000. As before, we have $10,000 of "long term" capital gains which can be used to reduce the taxable amount. But, in this case, we _cannot simply reduce our net profit by half of the long term gain amount_. That is, we cannot say that our taxable gain is $8,000 - $5,000 = $3,000. Why not? Because doing so would mean that we are reducing our net capital gain of $8,000 by _more than half_, which we are (unfortunately) not allowed to do. In fact, our net capital gain of $8,000 can only be reduced by the capital gains discount to $4,000.

In this case, even though we have $5,000 of _potential_ capital gains discount available, we are only able to use $4,000 of it to reduce our taxable gain. So $1,000 of our potential capital gains discount will be "wasted" in this scenario.​
Sometimes, it can be possible to turn Scenario 2 slightly to our advantage, as follows:

*Scenario 3*

Suppose we are in the situation described in Scenario 2 above, but we are also holding another stock (stock "D") which we are considering selling. We have only held stock "D" for a couple of weeks, but it is already showing us a profit of $2,000. Normally, if we sold it, we would not expect any capital gains tax relief since we've only held it for a short time. But, if we know that we have some potential capital gains tax discount available that would otherwise be "wasted", we could decide to sell stock "D" anyway. The "wasted" discount can be used up, even by selling a short-termer!

In figures: our net capital gain if we sold would be $10,000 + $6,000 - $8,000 + $2,000 = $10,000. All of our capital gains discount of $5,000 can be used up, giving a taxable gain of $5,000. So we have increased our realized profit by $2,000 (from $8,000 to $10,000), but have increased our taxable gain by only $1,000 (from $4,000 to $5,000). We are effectively getting the 50% capital gains tax discount on the profit from our short-term stock D!​
At this time of year, it can be worthwhile calculating your _exact_ tax position so that rational buy/sell decisions can be made before the end of the year.

(As mentioned above, I am not a tax expert so please do your own research and/or consult a professional. Any other forumites with more knowledge than me, please add your comments.)

- Snaggle


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## GreatPig (25 June 2007)

*Re: Tax question on capital gains vs losses*



			
				Snagglepuss said:
			
		

> or, more precisely, not relevant



It is relevant, and your examples demonstrate exactly that principle.

See this ATO document, particularly the initial statement:

"Capital losses can be offset against capital gains in the manner that produces the smallest net capital gain..."

and this line from the example:

"Sharon may choose to apply her capital losses in any order..."

GP


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## Snagglepuss (25 June 2007)

*Re: Tax question on capital gains vs losses*



GreatPig said:


> It is relevant, and your examples demonstrate exactly that principle.
> 
> "Capital losses can be offset against capital gains in the manner that produces the smallest net capital gain..."
> 
> ...




OK, GP, I think I see what you are saying now. Interesting. In my Scenario 1, for example, you are saying that a (stupid) person could choose to offset their $4,000 loss against their $10,000 long-term capital gain, thereby reducing their long-term capital gain to $6,000, of which $3,000 would be taxable. They would then add their short-term gain of $6,000 to give a total taxable gain of $9,000. Right? (Rather than a $7,000 taxable gain if they did it the sensible way, as in my example.)

I didn't realize that we taxpayers had this "choice" - although I don't see that it's much of a choice really - who would "choose" to pay tax on $9,000 when they could pay tax on $7,000? In my discussions with my accountants, we had always just netted everything, then applied the discount, as described in my examples. The idea that there might be other ways of netting off the losses, that would result in me paying more tax, wasn't raised. Therefore, I thought there was only one way of doing it. So thanks for the insight!

Having said all that, I'm not sure why you say that my "examples demonstrate exactly that principle", since my examples did not address the "choice" issue at all; rather, they highlighted how to calculate your taxable gain, and how you may end up with a "wasted" discount.

Regards, Snaggle.


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## GreatPig (26 June 2007)

*Re: Tax question on capital gains vs losses*



			
				Snagglepuss said:
			
		

> you are saying that a (stupid) person could choose to offset their $4,000 loss against their $10,000 long-term capital gain



I suppose they could. Of course if my accountant did that, I'd probably be looking for another accountant...



> I'm not sure why you say that my "examples demonstrate exactly that principle"



Because that's exactly what you did in your examples: you offset the loss against the short-term gain first (although you apparently didn't realise you were "choosing" to do that).

GP


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## nomore4s (28 June 2007)

*Re: Tax question on capital gains vs losses*

A quick question.

If I sell stocks today but the settlement obviously won't be until after June 30, is the tax on the CG payable this FY or next FY? i.e Is it the sale date or settlement date the counts?

Thanks


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## GreatPig (28 June 2007)

*Re: Tax question on capital gains vs losses*

I believe it's the date of contract, which means the sale date.

GP


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## nomore4s (28 June 2007)

*Re: Tax question on capital gains vs losses*

Thanks GP, was what I was thinking, seeing as you own the share on purchase date thought it would be the same for the sale.


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## laurie (28 June 2007)

*Re: Tax question on capital gains vs losses*

So what is the case when options expire because they did not make the money is that classified as a Tax loss as they no longer exists 

cheers laurie


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## GreatPig (28 June 2007)

*Re: Tax question on capital gains vs losses*

Laurie,

I believe that's covered by section 104-25(1).

GP


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## tibby (29 June 2007)

*Re: Tax question on capital gains vs losses*

Hi Guys,
Just a quick simple question for some of you out there! When buying and selling shares in this financial year--what contracts do I include on this years tax return--the date of the contract (i.e- the date I sold the shares) or the settlement date ( the date of the Registered Holding). 

I sold some shares yesterday 28th June-- but my settlement date is not until 3rd July?? Is this gain (yep made money!!) going to be recorded on this years return??

Any info would be much appreciated! Thanks.


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## GreatPig (29 June 2007)

*Re: Tax question on capital gains vs losses*

That was mentioned a few messages back. It's the contract date that's important, not the settlement date.

Take a look at the 2007 CGT Guide, page 7 under "Step 2".

GP


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