With COVID-19 lockdowns and restrictions in the rear-view mirrors of most of the country, the ATO is also beginning to resume ordinary compliance activity levels. One of the many areas it will be paying close attention to this tax time is “asset wash sales”.
An asset wash sale involves a person or business disposing of assets, usually just before the end of the financial year. After a short period of time, they then reacquire the same or substantially similar assets. The ATO sometimes views these transactions as a form of tax avoidance.
Although there may be legitimate reasons for selling and then reacquiring the same or substantially similar assets, a wash sale is different from normal buying and selling as it is usually undertaken for the artificial purpose of generating a tax benefit – such as a capital loss – in the current financial year.
The assets involved in wash sales are not necessarily traditional assets such as shares. Taxpayers could also be disposing of crypto-assets and reacquiring them later as a part of a wash sale. With the price of many crypto-assets at a low ebb, people looking to rid themselves of these assets need to be careful they do not inadvertently attract the attention of the ATO.
To stamp out this behaviour this tax time, the ATO will use analytics to identify wash sales through data from various share registries and crypto-asset exchanges. Where the system identifies a wash sale, the capital loss claimed by the taxpayer in their tax return will be rejected. The Commissioner of Taxation may then make a determination to adjust their tax situation, and compliance action and additional tax, interest and penalties may be applied.