Tax on Selling Shares: What you need to know

Understanding the tax implications of shares is a critical part of trading. Whether you are looking to sell a large part of your portfolio or are just getting started on building one, it pays to know how taxes on selling shares work.

That's why we have assembled a comprehensive guide on the subject. We will help you understand these concepts so you can make informed decisions about your portfolio.

What taxes do you pay for selling shares?

The money you make for selling shares is subject to capital gains tax (CGT). Capital gains refer to profits you have acquired by disposing of an asset.

You (or your accountant) need to calculate capital gains tax based on the asset's cost base.

This means that the money you initially spent on the shares is not the only thing subtracted from the sale price to determine capital gain. Other costs like brokerage fees, legal fees and capital costs are also considered.

If you sell a stock for a higher value than its cost base, your capital gain is the difference between these prices.

Capital gains tax is not paid until you dispose of an asset. The point at which you dispose of an asset is known as a CGT event.

When selling shares, the CGT event is the point at which ownership of your shares is transferred. You pay capital gains tax in the financial year in which the CGT event occurred.

Capital gains tax is not a "separate tax". Your capital gains are added to your taxable income, which is then paid at the appropriate marginal tax rate.

However, your capital gains are not added to your taxable income wholesale. Your gains can be offset in a number of ways to produce your net capital gain:

• Capital losses can be subtracted from your capital gains.
• If you are an Australian resident who has owned the asset in question for longer than 12 months, you are usually entitled to a 50% discount on your capital gains.
• Various other capital gain discounts can also apply. For instance, assets acquired before 21 September 1999 can have their cost bases indexed for inflation. However, using this method disqualifies you from the 50% 12-month discount method.

Capital gains vs capital losses

Of course, you do not always sell shares at a profit. When you sell shares, you may claim capital losses you have incurred.

Calculating your capital gain or loss is done in the same way. Your cost base is subtracted from the amount you made from selling your shares. If the resulting figure is a negative number, you have incurred a capital loss.

You have 2 options for using your capital losses on your tax return. You can subtract your capital losses from your capital gains from the same financial year. These losses can offset capital gains of any kind from the same year, including other shares or property sales.

If your capital losses are greater than your capital gains in a given financial year, you can carry your losses forward to future capital gains.

Taxes on selling shares as a share trading business

An important caveat on capital gains tax is that it does not apply to share trading businesses. For the purposes of Australian tax, these businesses are referred to as "share traders" and must submit a share trader tax return.

Gains and losses from selling shares are treated differently for share trading businesses. Gains made from the selling of shares, as well as dividends, are usually treated simply as assessable income for the business. Losses and costs incurred from selling shares are usually simple tax deductions, rather than capital losses.

This means that share trading businesses do not get the same perks that CGT offers. For example, they are not eligible for the 50% 12-month discount, and they do not have the ability to carry forward their losses.

How much tax do you pay on selling shares?

If you have held your shares for 12 months or longer, and you are an Australian resident, you are generally entitled to a 50% discount on your capital gains tax. If you have held it for less than 12 months, you will pay 100% of the capital gains tax.

Once your net capital gains have been determined and any other discounts have been applied, it is added to your taxable income. Tax is then paid based on your marginal tax rate.

• $0–$18,200: Nil
• $18,201 – $45,000: 19c for each $1 over $18,200
• $45,001 – $120,000: $5,092 plus 32.5c for each $1 over $45,000
• $120,001 – $180,000: $29,467 plus 37c for each $1 over $120,000
• $180,001 and over: $51,667 plus 45c for each $1 over $180,000

Note that the above rates do not include the Medicare levy of 2%.

Taxes on selling shares for non-residents

The tax implications for selling shares are different if you are not an Australian resident. Firstly, you need to determine what your tax residency is.

Different rules apply to Australian residents, foreign residents and temporary residents. Note that these terms mean different things to the Australian Taxation Office (ATO) than they do to the Department of Home Affairs.

See the ATO's guide to tax residency to determine your status.

Non-residents are not eligible for the tax-free threshold. They also cannot claim the 50% 12-month CGT discount.

Australia has tax treaties with over 40 countries. If you are a resident of one of these countries, these add various nuances to your tax. You can find all of Australia's tax treaties on the ATO website.

Australia's marginal tax rates for foreign residents are:

• $0 – $120,000:5 cents for each $1
• $120,001 – $180,000: $39,000 plus 37 cents for each $1 over $120,000
• $180,001 and over: $61,200 plus 45 cents for each $1 over $180,000

Taxes on selling shares vs share dividends

Taxes on selling shares come with distinct rules when compared to share dividends

Dividends are earnings distributed by a company to its shareholders. They are generally paid out as cash or as additional stock.

Capital gains tax does not apply to dividends paid out as cash. These dividends are ordinary income. This means that elements of CGT such as the 50% 12-month discount or the ability to offset gains with losses do not apply to dividend earnings.

Share dividends are unique from capital gains in that they are subject to franking credits.

Franking credits work like this: Companies pay 30% tax on their profits in Australia. When dividends are distributed, they come with franking credits.

These credits reduce the taxable investment income of the shareholder receiving the dividend based on the amount of tax that has already been paid by the company.

Other than franking credits, paying tax on your dividends is very similar to other forms of income such as your salary. The more complex rules of paying capital gains tax do not apply.

You now have a comprehensive understanding of how tax law applies when selling shares. Whether you're ready to sell or formulating long-term plans, it's ideal to have access to knowledge and insight surrounding the complex world of investing.

HALO Technologies offers solutions for any and all investors through our trading platforms and powerful research tools. Find out how we can assist you in selling your shares at Share Sales Direct today!

Frequently Asked Questions

What tax do you have to pay on inherited stocks?

Generally, the normal rules of capital gains tax apply to inherited stocks. The cost base for inherited stocks is usually the cost base for the asset on the day the deceased died. You do not have to pay capital gains tax on these stocks until you dispose of them.

For the purposes of the 50% CGT 12-month discount, you can treat an inherited asset as though you have owned it since:

• the deceased acquired the asset, if they acquired it on or after 20 September 1985.
• the deceased died, if they acquired the asset before 20 September 1985.

What tax do you have to pay on shares held in superannuation?

Investment earnings in super have a maximum tax rate of 15%. For capital gains, the maximum tax is 10%.

If you are aged 60 years or older, you can generally withdraw super via an income stream without paying any tax. Those under 60 may have to pay tax on super withdrawn via an income stream.

Over-60s generally will not have to pay tax when withdrawing lump sums from taxed super funds. In the case of untaxed super funds like public sector funds, you may be required to pay tax. In most cases, taxes apply for under-60s withdrawing lump sums from their super.

Once you reach retirement age, you can maintain funds up to the transfer balance cap, tax-free. The current transfer balance cap is $1.7 million.

How does tax work for ETFs?

Exchange-traded funds (ETFs), as you probably know, are funds that trade on exchanges and aim to replicate the performance of a specific index. They are a number of stocks all grouped together.

ETFs can have different tax implications than regular share trading. Often, ETFs will automatically reinvest dividends and distributions for shareholders.

Dividends and distributions must still be declared on your tax return. Even when they are immediately reinvested, they are treated the same as cash.

When it comes to capital gains tax on sold shares, the rules for ETFs are very similar to regular stocks.