Wash sales: The ATO is cleaning up dirty laundry

The ATO is warning taxpayers to not engage in “asset wash sales” to artificially increase their losses and reduce gains or expected gains.

Wash sales are a form of tax avoidance that the ATO is focussed on this tax time and typically involve the disposal of assets such as crypto 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.

This is done to create a loss to offset against a gain already derived, or expected to be derived, in certain circumstances, in a tax return.

A wash sale is different to normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year. The taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital gains loss and obtaining an unfair 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.

Taxpayers who may be engaging in wash sales 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 ATO advises taxpayers to check its website or check with an independent registered tax professional and not to rely on advice you may receive through media, social media, or advertisements.

It 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.