The end of the financial year is a good time to assess your capital gains and work out if you have a net capital gain from stocks sold. If so, you should also be looking through the portfolio for stocks with losses that you could sell to offset paying tax on the gains.
You know the stocks, those duds you didn’t sell when it was obvious you should sell. Those stocks that you shut your eyes to and hoped against hope they would rebound miraculously … but they kept falling. Those stocks. Those small illiquid stuff ups that you regretted buying but let linger in your ‘portfolio’. All those short-term trades that became long-term ‘investments’.
Now is the time to think about selling them, especially the illiquid ones because by the time everyone else wakes up to their capital gains tax loss in the last two weeks of June, these stocks will have been dumped, making your emotional turmoil even harder to squeeze a trade out of. So better you assess and sell now before the bloodbath starts, which it does every year, in every small trading stock that has gone down.
Selection is personal
I have had an email asking which stocks are likely to be most affected by tax loss selling. From your point of view, it is simply which stocks are in your portfolio, have not performed well this year and are small and illiquid and likely to get sold off by tax loss sellers. There are no ‘good’ stocks to take a loss on generally … just your own stocks. The stocks to sell are staring you in the face.
I could print you a list of the worst performers this year but it wouldn’t help. It’s personal. What do you hold that you could sell and what do you hold that other people will sell?
The only ‘game’ to play here is as a trader buying stocks that are small illiquid bad performers if they have been pummelled running into the last week of June. Stocks that are trading favourites always have a lot of stale holders. They are killed in June and often resurrect in July.
Hints for taking a loss
It is one of the hardest things to convince a broker, let alone a novice trader, to take a loss. So to help with the process, we have developed arguments to persuade you (they don’t seem to work on ourselves). If you are having trouble taking a loss, not enjoying your trading, are getting emotional and the stock is still in your possession … read my 10 reasons for why you should think about letting go of the dogs. You will put the sell order on before you get to the end:
1. If a stock is going down it is far more likely to continue going down than it is to turn on a sixpence to suit you.
2. The further a stock falls the more intense the selling becomes as higher losses cause more selling decisions, so sell early – an early loss is the smallest loss.
3. If you sell 10 falling stocks, it will be the right thing to do in nine cases, but you will only remember the other one.
4. If you sell now, you are no longer exposed, and all you have to do is come to terms with the loss.
5. If you sell now you can always buy it back – you might even buy it back lower than you sold it. Be aware of the ATO’s ‘wash-sales’ rules explained later.
6. If you sell now, you enter the eye of the storm and all becomes calm. You have a moment to think and you can watch from a distance. You can always choose to enter the storm again and you will be thinking more clearly and be armed with a plan.
7. If you are making a loss on a stock, think to yourself … “if I had cash would I buy this stock now at this price?” If the answer is ‘No’, then why are you holding it? Sell it. Most people begin to ‘hate’ the stocks they lose money in … so this argument always works.
8. Your state of mind has a value. What would your spouse pay (or you pay) to have you carefree at the weekend instead of ripping the heads off the kids. Look after yourself. There are not that many weekends in the year or your life. Don’t ruin too many of them by keeping risky loss making positions until Monday because you didn’t have the guts to sell them on Friday. There is no logic in being emotional about losses. If it’s gone it’s gone.
9. Averaging down is a mug’s game. If you have money to invest you should be putting it in the best investment in the whole world. Do you really think that will be the very same stock you have already bought at a higher price and that is falling at the moment? Very unlikely. You already have an exposure … why do you need more of something that has already proved itself to be a dog.
10. If in doubt, sell it. It crystallises a capital loss for this tax year. Why wait until the end of the year to take your losses? Taking losses today could set you up for making and taking gains this year. You can always buy it back once you’ve made the sale.
ATO wash-sales provisions
If you do decide to take a loss before 30 June but plan to re-adopt one or more of your dogs in the new financial year, be mindful of the ATO’s position on wash-sales. If you repurchase the shares you sold very shortly after at a similar price, the ATO will look at that transaction unfavourably and you may be subject to anti-avoidance rules.
Hopefully you hold good long-term stocks and won’t have to take a loss, but when you do, read this again and see if you can get to the bottom of the list before you have put on the order to sell.
Marcus Padley is a stockbroker with MTIS Pty Ltd and founder of the Marcus Today share market newsletter. Marcus has been advising institutional clients and a private client base for over 34 years. This article is for general education purposes only and does not address the personal circumstances of any individual, nor does it cover all possible events. Professional advice should be sought before taking any action, including taxation and financial advice.