When it comes to capital gains tax (CGT) and investment strategies, it’s crucial for investors to be aware of what is known as “wash sale” Tax Rules in Australia. While the term originates from U.S. tax law, the Australian Taxation Office (ATO) also pays close attention to similar activities that may breach the anti-avoidance provisions of Australia’s tax system.
What Is a Wash Sale?
A wash sale typically refers to the practice of selling an asset—such as shares or crypto—at a loss, and then repurchasing the same or a substantially identical asset shortly afterward. The goal is often to crystallise a capital loss to offset gains and reduce a tax liability, while effectively maintaining the same investment position.
In the U.S., this is directly prohibited under specific wash sale rules. Australia, however, does not have a named “wash sale rule” in legislation—but that doesn’t mean such activity is without consequences.
How the ATO Views Wash Sales
The ATO considers wash sales under the lens of Part IVA of the Income Tax Assessment Act 1936, which deals with general anti-avoidance rules (GAAR). If a transaction is carried out with the dominant purpose of obtaining a tax benefit, such as creating an artificial capital loss, it can be disallowed by the ATO.
In July 2022, the ATO publicly warned taxpayers against wash sales, especially in the lead-up to the end of the financial year. It noted that selling an asset and repurchasing it soon after—without any genuine change in economic ownership or risk exposure—may be considered tax avoidance.
ATO’s Criteria for a Wash Sale
The ATO may look closely at transactions where:
- An asset is sold and quickly repurchased (same or substantially identical).
- The main intention appears to be claiming a capital loss.
- There is minimal or no change in the economic exposure or investment risk.
If these red flags are present, the ATO may:
- Deny the capital loss.
- Apply penalties or interest.
- Reclassify the transaction under anti-avoidance provisions.
Acceptable vs Unacceptable Practices
Here are some general examples of how to tell the difference:
| Acceptable | Unacceptable (Potential Wash Sale) |
|---|---|
| Selling an asset due to changed investment goals or market outlook, without repurchasing it soon after. | Selling shares for a tax loss and buying back the same shares (or similar ones) within days. |
| Rebalancing a portfolio in response to economic conditions. | Creating a loss on paper for tax purposes, but maintaining the same market exposure. |
| Selling one type of asset and moving funds into a materially different investment. | Using related parties or separate accounts to mask a repurchase. |
Cryptocurrency and Wash Sales
With the rise in crypto trading, the ATO has also been watching for wash sale activity in digital assets. Given the ease of instant transactions on exchanges, some traders might be tempted to sell a cryptocurrency at a loss and buy it back minutes later. Such actions could fall squarely into the wash sale category if the intent is purely tax-driven.
Tips to Stay Compliant
- Familiarise yourself with the ATO publications such as Taxation Ruling TR 2008/1 Income tax: application of Part IVA of the Income Tax Assessment Act 1936 to ‘wash sale’ arrangements and ATO Tax Alert “Wash sales: The ATO is cleaning up dirty laundry”
- Document your reasons for selling assets—record any change in financial strategy, market research, or personal circumstances.
- Avoid quick repurchases of the same or similar assets.
- Consult a tax advisor, especially if planning transactions close to the end of the financial year.
Conclusion
While Australia doesn’t have a formal “wash sale rule” like the U.S., the ATO is clear: engaging in transactions with the primary aim of generating artificial losses for tax benefits can have consequences. Being aware of the ATO views and guidance is essential for investors who want to stay on the right side of compliance.
Disclaimer: The information provided in this article is intended for general informational purposes only and should not be relied upon as legal, financial or any other type of professional advice. The content presented here is not tailored to individual circumstances, and therefore, readers should not act upon this information without seeking appropriate professional guidance specific to their unique situation. The author and publisher of this article disclaim any liability or responsibility for any loss or damage that may arise from reliance on information contained in this article.