ATO to target ‘wash sales’ this tax time

The ATO is warning taxpayers to not engage in ‘asset wash sales’ to artificially increase their losses to reduce gains (or expected gains).

Wash sales are a form of tax avoidance that the ATO is focussed on this tax time.

Wash sales typically involve the disposal of assets (e.g., cryptocurrency and shares) just before the end of the financial year, where after a short period of time, the taxpayer reacquires the same or substantially similar assets.

Such sales are usually done to create a loss to be offset against a gain already derived (or expected to be derived) in a tax return.

A wash sale is different from the normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year.

Ultimately, under a wash sale a taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital loss and obtaining a tax benefit.

The ATO’s sophisticated data analytics can identify wash sales through access to data from share registries and crypto asset exchanges.

When the ATO identifies this behaviour, the capital loss is rejected, resulting in an even bigger loss to the taxpayer.

The ATO has warned taxpayers who may be engaging in wash sales that they are at risk of facing swift compliance action and additional tax, interest and penalties may apply.

Taxpayers are urged to ignore any advice encouraging a wash sale of any asset.

The clear advice from the ATO is to check the ATO website or check with an independent registered tax professional rather than relying on advice received through media, social media, or advertisements.

The ATO is also reminding tax advisers who may be promoting wash sales or other tax avoidance activities that they may face action from the Tax Practitioners Board.

“Most tax advisers do the right thing, but a small number encourage this behaviour. Promoting a tax avoidance scheme will have serious consequences for the tax adviser and could leave their client with a large tax bill,” Assistant Commissioner Tim Loh said.

Ref: ATO media release, 27 June 2022