Tax loss selling is a common tactic deployed by many ASX investors.
However, did you know that one wrong move could land you in hot water with the tax office?
It's fair enough to sell off your ASX shares that are deeply in the red before the financial year ends on 30 June.
This allows you to count those capital losses in this year's tax return, hence reducing your liability to the Australian Taxation Office.
But as with every year, authorities will be watching very carefully what you might do next.
When tax-loss selling turns sinister
The ATO will be monitoring your transactions to see whether you rebuy those dumped shares in the new financial year.
Because then legitimate tax-loss selling turns into an illegal "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 warned investors last year.
"The taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital gains loss and obtaining an unfair tax benefit."
An ATO spokesperson told The Motley Fool that investors who executed wash sales were "at risk of facing swift action" from authorities, including paying "additional tax, interest and penalties".
"The ATO's sophisticated data analytics can identify wash sales through access to data from share registries and crypto asset exchanges so the risk of the ATO identifying wash sales is high."
Don't listen to finfluencers
The tax office also warned investors about social media influencers who recommend such practices.
"Taxpayers are urged to ignore any advice encouraging a wash sale of any asset," said the ATO spokesperson.
"Check the advice on 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. If something seems too good to be true, it probably is."
ATO assistant commissioner Tim Loh also urged investors to dob in advisors who were spruiking wash selling.
"Most tax advisors do the right thing, but a small number encourage this behaviour," he said.
"Promoting a tax avoidance scheme will have serious consequences for the tax advisor and could leave their client with a large tax bill."
