ATO’s brutal warning to ASX investors

A common practice in June is under scrutiny as the tax office seeks to stamp out illegal ‘wash selling’ of stocks.

A close up of a dodgy man's face as taken from inside a washing machine as he looks in the machine with a sly grin on his face and holds the door open with one hand.

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Key points

  • The ATO has warned investors it will be looking for illegal 'wash sale' activity
  • A wash sale is when investors dump loss-making shares at the end of financial year for tax benefits then attempt to re-buy them soon after
  • The tax office is also urging investors to seek tax advice from reputable sources

The Australian Taxation Office has warned it will be watching a particular practice involving investors who dabble in ASX shares and cryptocurrencies.

In June, just before the financial year ends, many investors sell off badly performing stocks or crypto to reduce their capital gains tax liability.

This is called tax-loss selling which, in itself, is legitimate.

But the tax office will be watching out to see if those same investors re-buy those dumped ASX shares straight after the new financial year starts.

Because then innocent tax-loss selling becomes a ‘wash sale’.

“A wash sale is different from normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year,” the ATO stated.

“The taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital gains loss and obtaining an unfair tax benefit.”

Too good to be true? It probably is

Investors who are practising wash selling will face “swift compliance action” that may result in additional tax, interest, and penalties, the tax office warned.

The ATO also cautioned that following financial advice from social media influencers could get investors into trouble.

“If something seems too good to be true, it probably is,” stated the office.

“The clear advice from the ATO is to check the ATO website or check with an independent registered tax professional and not to rely on advice you may receive through media, social media, or advertisements.”

The ATO disclosed that it uses “sophisticated” data analytics to sniff out wash sales, with the assistance of information from share registries and crypto exchanges.

When a wash sale is identified, the capital loss is rejected, magnifying the loss for the investor.

“Don’t hang yourself out to dry by engaging in a wash sale,” ATO assistant commissioner Tim Loh said.

“We want you to count your losses, not have them removed by the ATO.”

Dob in investors who are wash selling

The ATO also warned of action against tax advice professionals who are promoting wash sales.

“Most tax advisors do the right thing, but a small number encourage this behaviour,” said Loh.

“Promoting a tax avoidance scheme will have serious consequences for the tax advisor and could leave their client with a large tax bill.”

Australians are encouraged to dob in investors who are practising wash sales via the ATO tip-off form or reporting the professional advisor to the Tax Practitioners Board.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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