Those investors who are lucky enough to be sitting on a pile of capital gains this financial year might consider the strategy of tax loss selling to minimise their tax bill this year.
Tax loss selling has become a popular strategy to dispose of underperforming shares and at the same time crystallising a loss to offset the capital gains made throughout the year.
While this seems like a reasonable strategy on paper, it does present investors with a number of important issues. Firstly, an investment decision should always be the primary focus when it comes to portfolio management – not tax management.
The Australian Tax Office (ATO) also has some pretty stringent anti-avoidance rules in place to prevent investors trying to sell their shares for the sole purpose of claiming tax losses.
The other issue the ATO watches closely for is the practice of 'wash sales'. This is where an investor sells their loss-making asset to realise a loss and then buys back that same asset a short time later – a sign that the sale was conducted purely to reduce their capital gains tax bill.
Despite these issues, I think a number of shares will be likely targets of tax loss selling this year including:
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Origin Energy Ltd (ASX: ORG) – Origin has been the worst-performing major energy company over the last 12 months with its shares losing around 58% of their value in that time. Other companies in the sector have also faced a tough 12 months as a result of the collapse in oil prices and a number of other energy companies are also likely to be the targets of tax loss selling.
- Spotless Group Holdings Ltd (ASX: SPO) – Shares of Spotless plunged by more than 50% late last year on the back of a poor trading update. The share price has yet to make a meaningful recovery with investors now questioning the motives behind the private equity led float.
- Slater & Gordon Limited (ASX: SGH) – The troubles surrounding Slater & Gordon are well known and it is probably the top candidate for tax loss selling this financial year. The shares have fallen a massive 93% from this time last year with few investors making any money on the way down.
- Shine Corporate Ltd (ASX: SHJ) – Shine has suffered from some of the same accounting issues that plagued Slater & Gordon albeit with less serious consequences for the financial health of shareholders. Despite this, the shares have still lost around 58% of their value since this time last year.
- Capitol Health Ltd (ASX: CAJ) – Worse-than-expected financial results combined with regulatory uncertainty has seen Capitol Health's share price get crushed over the past 12 months. The shares finally look as though they have hit rock bottom, but are still more than 80% lower from this time last year.
- Atlas Iron Limited (ASX: AGO) – It might be hard to believe that Atlas Iron has lost even more value over the past 12 months, but in fact it is worth 83% less today than this time last year. This example highlights the point that a stock can keep falling even after falling more than 99% between 2011 and 2014.
Foolish takeaway
Tax time is a great time to review your portfolio but investors should not forget that the investment decision should always take priority over the taxation decision.
