Today marks the end of the 2025 financial year.
Investors may find themselves rushing to make financial transactions so they can be claimed on their tax return for this financial year.
With the S&P/ASX 200 Index (ASX: XJO) currently just below its all-time high, it's been a good year for many investors. If they have sold their shares for a profit during the past 12 months, they may be sitting on substantial capital gains.
There are several standout companies that have risen significantly over the past five years. Telix Pharmaceuticals Ltd (ASX: TLX) is up a staggering 1,795% over that period, while Life 360 Inc (ASX: 360) is 1,540% higher.
Even ASX 200 banking stocks are substantially higher than they were five years ago. Of course, the standout has been Commonwealth Bank of Australia (ASX: CBA), which has risen 168% over five years.
Investors may also be sitting on substantial short-term profits that they seek to cash in. Since the 'Liberation Day' dip, the ASX 200 Index is 16% higher. Several companies have materially outperformed the index since 7 April, such as Pro Medicus Ltd (ASX: PME), WiseTech Global Ltd (ASX: WTC), and Lovisa Holdings Ltd (ASX: LOV), which are all at least 42% higher.
Investors sitting on substantial capital gains may be tempted to sell their loss-making stocks to reduce their tax bill.
But should they? That depends.
Reasons to sell
There are several valid reasons to sell a loss-making stock before the end of the financial year.
Most importantly, if your investment thesis is broken and you have lost conviction in the stock. If you're thinking of selling anyway, doing so while you have accrued significant capital gains will reduce your tax bill.
For example, shareholders of Cettire Ltd (ASX: CTT) may be thinking about whether to cut their losses. The luxury goods retailer has had a challenging recent few months, and is down 85% since November 2024. As The Motley Fool's Bronwyn Allen recently reported, experts are predicting there may be further challenges on the horizon for the company.
Reasons not to sell
However, investors should be cautious about selling ASX shares for tax reasons alone. A tax benefit could soon be negated if the share price suddenly reverses. As we have seen since the Liberation Day dip, ASX stocks can sometimes rebound very quickly.
This is more likely to occur if a company is undervalued.
For example, CSL Ltd (ASX: CSL) is down 20% over the past year. However, JP Morgan Chase & Co (NYSE: JPM) has placed an outperform rating on the stock and forecasted at least 30% upside over the next 12 months. If this materialises, it would certainly outweigh any tax benefit received in the current financial year.
Another example is Monash IVF Group Ltd (ASX: MVF). The healthcare stock is down 46% for the year to date. However, broker Macquarie Group Ltd (ASX: MQG) is tipping around 100% upside for the stock. Once again, if Macquarie is correct, the potential upside would far outweigh any tax benefit that could be generated by selling the stock this financial year.
