Introduction
Tax-loss selling is the practice of selling stocks prior to June 30 that have lost investors money over the course of the financial year. Sales take place to offset capital gains and lower one's tax liability.
Knowledge of this seasonal effect is important because prices in stocks likely to come in for tax loss selling can be expected to be weaker as a result.
The probability of lower prices means:
- Current owners can expect their stocks to come in for selling pressure
- Potential owners can expect lower prices in the lead up to June 30
Warning: If your intention is to buy back your position at a later date you need to ensure you do not give rise to a "wash sale" which may result in cancellation of the tax benefits obtained in connection with the sale. For more details see Tax Ruling TR 2008/1 at the ATO website.
Furthermore "wash sales" are a potential breach of the law or ASX Market Rules. The regulatory issues which arise in any sort of tax crossing are not just whether it moves prices or creates impressions of false volume, but whether there is a true change in beneficial ownership after the crossing and whether it is done for the purpose of tax avoidance.
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Tax loss Selling Candidates
Tax loss selling occurs in stocks that by definition lost their investors money. Opportunities are most productive in stocks that have:
- Fallen consistently over the course of the financial year.
- Fallen at some point over the year the financial year
- Some issue specifically related to its performance, and have not fallen simply because of a weaker market
- Stocks in sectors that are underperforming
Price performance: Tax loss selling period 2007
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1-yr performance*
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Period: 14/05/07 - 29/06/07
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Bendigo Mining
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-84.9%
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-15.6%
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Chemeq
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-79.8%
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-7.2%
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Kimberley Diamond
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-50.7%
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-4.8%
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Great Southern
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-40.0%
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23.3%
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Timbercorp
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-39.5%
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-4.3%
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Iluka Resources
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-11.7%
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3.1%
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McGuigan Simeon
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-10.8%
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-31.6%
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* May 14, 2007: Source AFR
How to search for poor performers
The Andrew West website allows you to search stocks based on a range of criteria. On the left hand side of any page click on Analyse Stocks then Add Filter. Then sort by 1 yr. avg Annual return and choose the action Sort by lowest.
The output allows you to see which stocks are likely to come in for tax loss selling and adjust your sales, purchases accordingly.
Implications
- Look at selling stocks that you own that appear on the list if you have gains elsewhere.
- Consider adjusting buying and selling prices in light of potential weakness in tax loss selling candidates during the period up to June 30.
- Profit from potential weakness in tax loss selling candidates through the use of options, warrants and CFDs
