Using the tax laws to your advantage is a no-brainer. In that sense, selling a losing company to use the tax loss in this year to offset gains, and reduce your tax bill, sounds sensible. Equally, electing to hold a little while longer so you meet the 1-year threshold to receive the capital gains tax (CGT) discount also seems like a no-brainer; it?s like free money.
But is selling this year?s big losers like Vocus Group Ltd (ASX: VOC) or Sirtex Medical Limited (ASX: SRX), specifically for the tax benefit, a shrewd decision?
It is not.
While everyone?s investment goals differ, typically you invest in shares…
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Using the tax laws to your advantage is a no-brainer. In that sense, selling a losing company to use the tax loss in this year to offset gains, and reduce your tax bill, sounds sensible. Equally, electing to hold a little while longer so you meet the 1-year threshold to receive the capital gains tax (CGT) discount also seems like a no-brainer; it’s like free money.
It is not.
While everyone’s investment goals differ, typically you invest in shares to multiply your wealth over the long term, with more risk and more rewards than a cash account. With that in mind, selling your shares specifically for the tax benefit is a bit weird, like going to Hawaii for the air-conditioning.
Famous fund manager Peter Lynch once quipped that:
“For some reason investors are delighted to get the tax loss, as if it’s a wonderful opportunity or a gift of some kind – I can’t think of another situation in which failure makes people so happy.”
The only reason you should sell your shares is because your ‘thesis’ is broken, i.e., because you’ve lost faith in the company’s ability to deliver whatever it is supposed to be delivering (growth, strong dividends, cost cutting, etc).
Otherwise, selling to claim a tax loss is basically akin to selling because the share price has fallen, and the share price is not a fair indicator of whether a company will be successful or not. There is a popular finance blog with a post that shows a chart of Netflix‘s share price falls over time. According to their data, Netflix has experienced 3 share price drawdowns of 70% from its previous peak, and in 2012 it was down 80%. It probably looked like an ideal tax-loss-benefit candidate at the time, but Netflix’s diluted earnings per share have grown 50% since 2012, revenue has gone from $3.6 billion to $8.8 billion, and the share price is up from $9 to $152.
If you’ve decided a company is poor quality/ too risky and you no longer want to hold it, by all means sell it in a way that advantages you the most.
Selling simply for the tax benefit alone is never the right answer.
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Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.