@MostoyswinsYes. You have to sell the shares to claim the capital loss. Otherwise it is considered a 'paper loss', and cannot be used for tax purposes. It essentially goes hand in hand with CGT.
If you hold an asset that has depreciated e.g. you bought 100,000 shares at $0.50, so $50k, and the share price was $0.20 then if you sold them and re-bought at $0.20 (for simplicity, you did a wash trade) then you have an
actual realised loss of 100,000 x $0.50 - 100,000 x $0.20 ($50k - $20k) = $30k.
As such, if you had made a profit from other asset sales during the FY (financial year, being 1 July 2021 - 30 June 2022), or you have a high income and pay a lot of tax, then you can offset the $30k loss against that 'income'. That is, you do not pay tax on $30k. (If you are paying circa 50% tax (for simplicity)) then this equates to $15k value to you.
I note that to obtain a tax loss, you do not need to re-purcahse the asset. That is, you can sell and move on and just use you retained capital elsewhere, and your tax loss offset against profits/income. I have included the 'wash trade' for the below examples, so that you can see if you believe in the long term prospects of a company it is not necessarily a bad thing to do.
For those the other day querying tax loss selling, T+2 has no applicaiton, that relates to mechanism of share transfer. It is irrelevant. What matters is the date on which you sell (or buy, for CGT purposes), that is, you can sell all the way up to the EOFY, being 30 June 2022. This is one of the reasons we are seeing a bounce across the market in a lot of stocks - people have stopped their tax loss selling.
CGT - if you hold (most assets) for longer than 12 months, you are only subject to CGT on half of your profit. As such, using the above example
- Bought at $0.50 and not sold at $0.20, then sold at $1. You pay tax on $1 - $0.50, which is $0.5 x 100,000 = $50k. If you held this asset for longer than 12 months, then you only pay tax on half of that amount, being $25k.
- Bought at $0.50 and sold at $0.20, then sold at $1. You pay tax on $1 - $0.20 = $80k. If you held this asset for longer than 12 months, then you only pay tax on half of that amount, being $40k. However, because you sold at $0.20, you can use your tax losses from above being $30k. As such, if you held the asset for longer than 12 months and sold at $1 and used your tax loss, then it would mean that you only pay tax on $10k.
Obviously in the second example, it is advantageous to exercise a tax loss. However, if you want to sell prior to 12 months (and so you don't obtain then the CGT discount it is not as advantageous, becase you would be paying tax on $80k-$30k, which is $50k.
However, it is also not as advantageous if the shareprice dramatically increases. For exmaple if it went to $5.
- Bought at $0.50 and not sold at $0.20, then sold at $5. You pay tax on $5 - $0.50, which is $4.5 x 100,000 = $450k. If you held this asset for longer than 12 months, then you only pay tax on half of that amount, being $225k.
- Bought at $0.50 and sold at $0.20, then sold at $5. You pay tax on $5 - $0.20 = $480k. If you held this asset for longer than 12 months, then you only pay tax on half of that amount, being $240k. However, because you sold at $0.20, you can use your tax losses from above being $30k. As such, if you held the asset for longer than 12 months and sold at $1 and used your tax loss, then it would mean that you only pay tax on $210k.
I have included the CGT example, because you can see that one fo the reasons that the ATO wants to ensure that you have an
actual realised loss is because it resets the CGT clock.
