Inadvertently 'wash selling' your ASX shares this tax time? Here's what could happen to you

Many investors fall into this common trap, and it will gt you some heat from the ATO.

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It's a trap you really don't want to fall into with your ASX shares. As we covered earlier this month, the Australian Taxation Office (ATO) is keeping a close eye on what it calls 'wash selling' this tax time. And if you get caught wash selling, even inadvertently, then the ATO might have something to say to you.

Let's back up a little, though.

What does washing your sales mean?

'Wash selling' is the practice of selling ASX shares close to tax time and then buying them back just after tax time in order to obtain a favourable tax treatment.

If you have an ASX share that is currently down significantly from where you bought it at, you are eligible (and legally entitled to) sell it to book a capital gains loss on your tax return.

But that loss can only be realised if you actually sell the shares. So wash selling is done in order to obtain this 'loss', only for the investor to quickly buy back the shares after the loss has been booked.

The ATO frowns on this practice and has vowed to pursue those investors who attempt to pull it off.

As my Fool colleague Tony covered earlier this month, here's some of what the ATO has said on wash selling:

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

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.

This all means we have to be very careful about buying and selling any ASX shares around the end of June and the start of July. It doesn't matter if you are intending to make a wash sale.

If you make a series of trades that the ATO deems to be suspect, it might not matter whether you have the conscious intent to make a wash sale or not. The ATO could deem you as having enjoyed an unfair financial advantage regardless and act accordingly.

But what fate lies in store for the wash seller if caught?

What happens if you get caught wash selling your ASX shares?

Last year, the ATO issued a statement outlining the consequences for taxpayers if they get caught 'washing' their sales.

Here's some of that statement:

The ATO is warning taxpayers who may be engaging in wash sales are at risk of facing swift compliance action and additional tax, interest and penalties may apply. Taxpayers are urged to ignore any advice encouraging a wash sale of any asset.

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. If something seems too good to be true, it probably is.

ATO assistant commissioner Tim Loh told taxpayers, "Don't hang yourself out to dry by engaging in a wash sale. We want you to count your losses, not have them removed by the ATO".

So not only could any capital gains tax gains or losses that are booked get cancelled by the ATO, you might be looking at fines, extra interest and additional tax bills if you get caught.

As such, all ASX investors should be aware of these wash sale rules when it comes to buying and selling ASX shares around tax time. It might be tempting, but it's definitely not worth trying to break the rules here.

Motley Fool contributor Sebastian Bowen 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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