# Does Capital Gains affect the way you invest?



## Uncle Festivus (11 March 2007)

I was just reading a few posts about the markets gyrations over the last 2 weeks and wondered if any of you would have reacted differently if you could have sold but didn't because you would have to pay capital gains tax. It's apparent that there are a lot who havn't taken profits because of this reason.

I know it influenced me with the option of selling some gold shares when gold was at $720.

Or should capital gains be a flat 30% as per company tax?.


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## tech/a (11 March 2007)

No.

But a few years ago I did react without thinking to lose $30K in Capital gains tax. I thought about it a few days after selling.

One aspect that definately should be considered.
It is an interesting topic.

Say you DONT sell due to unfavorable conditions and the stock drops 15%-30% in the period it takes to hold for capital gains concession.

Your exit is triggered(Durig the 15-30% fall) and now you've made a loss of un realised equity and now still pay tax albeit lat ower rate on the balance.

Ive come to terms with it by simply following my method and exit WHEN my method says exit---pay the tax which all profitable businesses do.


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## stevo (11 March 2007)

I trade using a company so capital gains don't reduce if I hold for more than a year. Taking any profits triggers capital gains, which is why longer term holding is attractive.


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## wintermute (11 March 2007)

I would think about it... If I was a month away from holding for 12 months and thought the sp might drop a tad, I'd probably hold provided the 50% CGT discount would save me more than any drop in profit I anticipated during that time... hasn't been an issue for me yet though as I have some prior capital losses (from a bad decision with a managed fund back in the 90's) that I have been slowly using up to offset my gains... unfortunately these prior losses are offset against the full capital gain regardless of whether the stock was elligible for the 50% discount, which is I don't particularly like...  Even worse is that in a low income year you can't choose to postpone those prior year losses and opt to pay the tax.... this happened to me last year... I would have had a taxable income under 10K hence very low tax, but had to use up about 8K worth of my prior year losses even though the majority of the capital gain was not even taxable (due to the 6400 tax free threshold)..... sigh. 

Tony.


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## Realist (11 March 2007)

Tax is hugely important to me.

I avoid it at all costs.

So does Warren Buffett.  The reason he holds forever is simple - TAX!


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## Mac (11 March 2007)

tech/a said:
			
		

> Say you DONT sell due to unfavorable conditions and the stock drops 15%-30% in the period it takes to hold for capital gains concession.
> 
> Your exit is triggered(Durig the 15-30% fall) and now you've made a loss of un realised equity and now still pay tax albeit lat ower rate on the balance.



Agreed.

There's no point holding out waiting for CGT concessions if it is going to reduce your profits in doing so.


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## Realist (11 March 2007)

Mac said:
			
		

> Agreed.
> 
> There's no point holding out waiting for CGT concessions if it is going to reduce your profits in doing so.




Invest $100, it doubles in 9 months, and you sell, then you get $50 profit after tax.

Hold it for another 3 months, the price stays the same, but you get $75 profit after tax.

That is 150% of what you get if you sell to early. Massive difference!!


If you have a crystal ball and can tell for certain the share price will drop more than 16.5% over that 3 months then you must be a genius to know what a stock is doing, and you may as well retire now.


But if for some reason you are wrong and the price does not drop more than 16.5% or god forbid it does what stocks tend to do and it goes up, you've made a grave mistake and cost yourself money.

If anyone here can tell me a stock they are certain will drop more than 16.5% over the next few months please tell us...Otherwise you must agree tax is without question a very important consideration and it is almost always wise to hold to reduce it.


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## misterS (12 March 2007)

An issue that is probably not on the radar of single/married people is that if you are paying say, 36% of gross income in child support for a couple of kids, and employed paying top marginal rate, you lose close to 80% of every capital profit.  (losses - you get to retain 100%)

This puts you in sore need of the 50% CGT discount because the net effect is so profound.  It is a very demanding situation to see a decline setting in for a share that has been good to you until the 12 months hoves into view. 

Of course you can bail out of a position getting ugly for its own sake anytime, but as you get closer to the 12 months it sure concentrates the mind...

It tends to make any trading over less than 12 months pretty impractical. You have to take losses when you get a dog, but cannot really take a short-term profit - unless you have a budget of iron and can resist spending any more than your 20% share of the gross return in the rest of the tax year!


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## Mac (12 March 2007)

Realist said:
			
		

> Invest $100, it doubles in 9 months, and you sell, then you get $50 profit after tax.
> 
> Hold it for another 3 months, the price stays the same, but you get $75 profit after tax.
> 
> ...



Whilst I can see the point you are making there Realist, you are asking 'us' to name a stock that will drop 16.5% in 3 months and we must be geniuses yet you make an assumption that a stock will double in price in 9 months and then remain stagnant for a further 3.

I guess at the end of the day it depends on a multitude of variables including your personal tax situation, whether you use F/A or T/A (or combination of both) and how strictly you stick to your trading plan.  

As an example, if the sp of a particular stock you are holding starts to slide 4 months in and your indicators say sell - do you ignore it because of CGT implications?


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## tt1900 (12 March 2007)

Mac said:
			
		

> Whilst I can see the point you are making there Realist, you are asking 'us' to name a stock that will drop 16.5% in 3 months and we must be geniuses yet you make an assumption that a stock will double in price in 9 months and then remain stagnant for a further 3.
> 
> I guess at the end of the day it depends on a multitude of variables including your personal tax situation, whether you use F/A or T/A (or combination of both) and how strictly you stick to your trading plan.
> 
> As an example, if the sp of a particular stock you are holding starts to slide 4 months in and your indicators say sell - do you ignore it because of CGT implications?




It just need to balance all the factors to see which one is beneficial, it is a sure gain waiting for the tax concessions, and wise to wait. But it may be reasonable to sell when a strong expectation of sliding share price exists. personally, it seems extremely difficult to get a solid expectation of a single stock share price in the short period.

Di.


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## Realist (12 March 2007)

Mac said:
			
		

> Whilst I can see the point you are making there Realist, you are asking 'us' to name a stock that will drop 16.5% in 3 months and we must be geniuses yet you make an assumption that a stock will double in price in 9 months and then remain stagnant for a further 3.
> 
> I guess at the end of the day it depends on a multitude of variables including your personal tax situation, whether you use F/A or T/A (or combination of both) and how strictly you stick to your trading plan.
> 
> As an example, if the sp of a particular stock you are holding starts to slide 4 months in and your indicators say sell - do you ignore it because of CGT implications?




F/A will never tell you a share price is due for a big drop in the near future.

And l'm no astrologer (chartist) - so yes I would ignore any indicators that say sell. Much like I'd ignore the morning horoscope if it said "Sell your shares now".

I would hold no matter what if holding for just a month or so reduced my tax significantly.

Do you know of any shares that are going to drop in the next 3 months, I'd be interested to see your predictions if you have any?


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## Mac (12 March 2007)

Realist said:
			
		

> And l'm no astrologer (chartist) - so yes I would ignore any indicators that say sell. Much like I'd ignore the morning horoscope if it said "Sell your shares now".



Spoken like a true F/A - lol



			
				Realist said:
			
		

> I would hold no matter what if holding for just a month or so reduced my tax significantly.



Which is fair enough but what *if* you're talking about only 3 months in and prices started to slide - would you hold them for a further 9 months just to 'possibly' avoid paying extra CGT?



			
				Realist said:
			
		

> Do you know of any shares that are going to drop in the next 3 months, I'd be interested to see your predictions if you have any?



No I don't m8.


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## Uncle Festivus (12 March 2007)

Realist said:
			
		

> I would hold no matter what if holding for just a month or so reduced my tax significantly.




Realist,

You seem to be taking a huge leap of faith in 'the share market always rises' & the 'buy & hold' camp. My original example was for some gold shares I had, subsequently I held, and now (while still in front) I'm down a significant percent, all for the sake of paying tax. I have changed my view towards this accordingly so that I will make the trade irrespective of the tax implications from now on.

Theres no guarantee the share market will always rise, so when *WILL* you sell; what are your exit conditions?. Or have you only been trading during the bull market ie less than 3 years?.

Out of interest, I think the banking sector will under perform generally, 'going forward'.


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## Knobby22 (12 March 2007)

If you are on a high tax bracket, then you know a great gain to offset holding for a year with dividends. I'm with the majority of the poll. Capital gains tax is very important. Less so if you are holding it in a trust however still important. Hold except when the boom looks like entering. We are still in a bull market.


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## stevo (12 March 2007)

> And l'm no astrologer (chartist) - so yes I would ignore any indicators that say sell. Much like I'd ignore the morning horoscope if it said "Sell your shares now".



I find that reading chicken entrails works quite well, although it is hard to beat tea leaves. I think I will work on a 13 month system, although the number is unlucky!

If I didn't sell MBP when I did I would have lost 80% of my capital in the trade, rather than taking a very small profit, so trying to hold onto a profit could be very expensive.


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## Prospector (12 March 2007)

I think it was in the book 'share trading for dummies' that related the tale of an investor whose shares had risen from $5 to $50 and the owner didnt sell because he didnt want to pay the CGTax.  So he held and eventually they went down to $5 again, and so he sold because he didnt have to pay any tax.


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## Uncle Festivus (11 May 2007)

Thought I'd review this again in light of the pullback today. How much of a pull back in the market would make you sell, in spite of CG if this turns out to be a sell in May scenario, and being so close to financial year end?


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## disarray (11 May 2007)

hong kong has 0% CGT. if you are trading that much money its probably worth setting up a shell company in honkers and trading out of that. then you'd have to look at moving the money back into australia.

i saw on some tv show the other week that in the US the $10k ASIC reporting limit (their version of it anyway) was secretly lowered as part of the anti-terror provisions. is our reporting limit still $10k or has it been dropped as well? enquiring minds (who are looking at buying non-reportable gold blocks) want to know.


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## happytown (11 May 2007)

disarray said:


> ...
> 
> the $10k ASIC reporting limit




disarray,

do you mean the austrac compulsory reporting of transactions over 10k and 'suspicious' transactions below 10k, if so i think that remains unchanged

cheers


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## Smurf1976 (11 May 2007)

Realist said:


> F/A will never tell you a share price is due for a big drop in the near future.



I'm not convinced on that one.

What if you hold, say, a commodity producer and you have some decent knowledge of the underlying market. That won't guarantee a price rise or fall but it's certainly a fundamental "edge" that some have. 

Personally I don't worry about GCT since I only buy stocks on the basis of either long term fundamentals of the underlying industry or due to shorter term fundamentals that the market seems to have missed. My use of charts is limited to timing the actual entry and exit - I don't use them as the basis for selecting stocks.


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## Glenhaven (11 May 2007)

The thread is interesting because the reasons are different than for me.

I hold most of my shares for a long time and with these I have no intention of selling if I think the market will fall. The major reason is the capital gains tax.

For example St George Bank floated at $1.50 so a sale means nearly 50% of the sale price is taxable. If you sell you get approx 75% of the sale price after tax which you then need to invest in something that provides at least a 33% better return than St George to break square. A big ask.

So with most long term investments I have a problem with selling. If I was certain I could pick a big fall then I would consider it, but you are never sure and would probably get it wrong anyway.

I have a smaller amount of shares which are trading, and if you are a trader then capital gains tax does not apply and you are taxed on the total profit anyway. So in this caes capital gains has no impact. 

I keep the my trading and investment activities separate.


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## Uncle Festivus (2 March 2008)

12 months on and a totally different climate. So anybody doing it any differently now - tempted to take the profits of the last 4 years and pay the capital gains, or are we still hanging in there waiting for the light at the end of tunnel?

(yes 24, no 30)


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## MRC & Co (2 March 2008)

Personally, CGT does not stop me taking profit.  

Of course, if I was very close to the 12 month mark (days or perhaps weeks) and wanted to sell due to whatever reason, I could act differently, but this has never happened to date.  

So another "no" vote here!


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## Julia (2 March 2008)

Uncle Festivus said:


> 12 months on and a totally different climate. So anybody doing it any differently now - tempted to take the profits of the last 4 years and pay the capital gains, or are we still hanging in there waiting for the light at the end of tunnel?
> 
> (yes 24, no 30)



Yes, definitely.  I've taken profits of about 80% of my p/f, am holding only those with minimal debt which I am pretty certain are good for the long term.
Quite happy to accept 7% in cash a/c in the meantime.  Won't be buying anything until I see some stability return.


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## zarfius (7 March 2008)

I am a beginner investor so correct me if I'm wrong, but I feel that more money can be made with several trades over a long period of time vs buy and hold in a certain situations.

Lets take a hypothetical situation (it may be a lot hard in real life.. lol).

Lets say you buy 5000 stock A for $1.00 per share = $5000. After 6 months the share is up to $1.50 but after 12 months it has fallen to $1.25.

If you sell at 6 months you end up with:
(5000 x 1.50) - $70 brokerage = $7430
and at the end of the year you pay $1215 in CGT = $6215

If you sell at 12 months you end up with:
(5000 x 1.25) - $70 brokerage = $6180
and you don't pay the CGT at the end of the year.

In this example, over 12 month's your profit is the same, however, what are you doing with the money in the mean time.

If you sold after 6 months, you would have $7430 to invest in something else:
This time you buy 7430 stock B for $1.00 per share. After the remaining 6 months this share goes up to $1.25 and you sell for $9287.50

Your overall capital gain for the year is 9287.50 - 5000 = 4287.50 and the CGT you pay at the end of the year is $2143.75 so you end up with $7143.75 to play with next year.

Buy and hold = $6180
Buy sell, buy sell = $7143.75

There's a lot of math here and I have probably made a couple of mistakes, but it's something to think about anyway


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## bvbfan (9 March 2008)

A lot depends on your marginal tax rate. 
Highest being 46.5%

Now if you hold for a year you still pay tax effectively at 23.25% if highest tax rate. (50% discount on capital gains)

On your example
6months you'd pay 2430 x .465 = 1130

12months you'd pay 1180 x .2625 = 309.75


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