“With ETFs, the taxation can be quite complicated because they are taxed differently than corporations and there are different forms of income, so you’re going to have distributions, you’re going to have capital gains, you can have capital losses, and investors have to work through the distribution statements and basically all different kinds. separate income and profits to fill out the tax return directly.
She said this is a real challenge for novice investors entering the financial markets without receiving advice, and suggested that ETF investors seek specialized advice from a tax agent or financial planner.
Otherwise, ETF providers will generally provide investors with a tax statement at the end of the year that breaks down the distribution by the various elements and may also include instructions on the boxes investors should fill in on their tax returns.
“In general, an ETF takes the form of a trust and the return paid by an ETF is treated as a distribution from the trust. However, that return will include many different components, such as dividends, postage credits, interest, foreign earnings and capital gains,” H said.†R Block Director of Tax Communications Mark Chapman.
“You then have to break down each of those individual elements and fill them in the appropriate boxes on your tax return. The chance of errors is considerable
“Make sure you keep (and keep safe) your annual tax returns, because without them, accurately filling out your tax returns can be nearly impossible.”
‘Wash selling’ in the sights of ATO
In a warning to investors, the Australian tax office also said it was wary of unreliable investment claims, especially so-called wash sales.
In asset wash sales, investors sell assets such as crypto and stocks just before the end of the fiscal year, before quickly getting the same or similar assets back, to create an artificial loss that investors can then use to offset gains.
Almost 300,000 investors joined markets last year, after 435,000 in 2020 but as rising inflation and rapidly rising interest rates weigh on global and local marketsmany novice investors are also on their way to their first losses, realized or on paper.
“Don’t hang yourself drying by participating in a wash sale,” Assistant Commissioner Tim Loh said, adding that the ATO can identify wash sales by accessing stock registers and crypto asset exchanges.
“We want you to count your losses, not have them removed by the ATO.”
It also looks at capital gains and losses on stocks, cryptocurrencies and real estate. A capital gain or loss is the difference between what an investor paid when he bought the asset and what it was worth when he sold it.
Capital losses can only be offset against capital gains, explains Chapman. That means investors selling assets at a loss cannot offset their wages, corporate profits, interest, or dividends against the losses.
“If you have disposed of stocks or any other form of investment and you know you have made a capital gain, it makes sense to look at your investment portfolio and consider all the assets you own that you know you own, from the hand to do. at a loss,” Chapman said.
“As we approach the end of the fiscal year, this strategy is often used by investors looking to clean up their loss-making stocks in a tax-efficient way.
“If you do indeed have shares at a loss that you intend to sell to protect other capital gains that have accrued during the year, you need to make sure that the sale is genuine and that the intention is not to buy back shares in the new financial year.”
And, he added, investors need to understand the difference between real and paper losses, and when to claim losses on tax.
In general, paper losses are not available for capital gains taxes, he said.
“For example, in the past I may have bought a stock for $1 and at the end of the fiscal year it might only have been worth 50 cents. I’m at a notional loss of 50 cents, but unless I buy the stock at the end of the year actually get rid of that (that 50 cent loss crystallizes), I can’t claim it as a capital loss.
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