Learn how to calculate the tax you will pay when you sell your shares
When you invest in shares, it helps to have a general understanding of some of the tax implications this particular investment type may bring upon your finances.
The most common tax implication when investing in shares is calculating the capital gains tax you must pay when you sell shares that have made you money (a profit).
Any investment that generates positive returns, aka makes you money, is subject to capital gains tax. This guide however will only look at capital gains tax in relation to shares and how to calculate CGT (the abbreviated version of capital gains tax) when you sell.
By understanding the tax you will pay on your investment in shares, you will be better equipped to make investment decisions pertaining to when it makes sense to buy and sell and which option is financially better for you given your knowledge of how much tax you might be charged on the sale of your shares.
How to quickly tell if you need to pay CGT on shares
Before we go into how to calculate the capital gains tax on shares, it is best to quickly establish if you even owe any tax at all on your shares.
The quickest way to test this is to see if your shares have made money over the time since you bought them. If you are selling shares at a price that is below what you paid for them, you have made a loss and you do not need to worry about capital gains tax.
If the price of your shares have gone up since buying and now selling; you will have to pay CGT.
How much capital gains tax you have to pay can vary
The amount of CGT you will pay on your shares can vary depending on how long you have held the investment. This is to promote people holding shares for the longer term, instead of attempting to day trade or quite simply; gamble in the share market.
How to calculate capital gains tax (CGT) on shares
Let’s assume that you have made money on your shares, you are now selling and need to calculate your capital gains tax.
Here is how to do it:
If you hold the shares for less than 12 months
You will pay tax on the full amount of profit. This is the amount you have made on top of your initial investment (earnings). When I say full amount, I mean that every dollar you have made in earnings will be taxed at your individual income tax rate.
So if you make $1,000 and sit on a tax bracket that sees you paying $0.37cents per dollar, you will pay that rate of tax on your $1,000 in earnings. In this instance, you will pay $370 in tax leaving you with a return of $630 after tax.
If you hold the shares for more than 12 months
For people who hold shares over 12 months, the ATO gives you a 50% discount on your capital gains tax. This means that you only pay tax on 50% of your earnings.
So similar to before, if you make $1,000 and pay $0.37cents per dollar in tax, instead of paying tax on the full $1,000 – you only need to pay tax on 50% of it, aka $500 because you held the investment for over 12 months.
On $1000 of earnings, that means the tax you will pay is only $185, half that of someone who held their shares for under 12 months.
So what does this mean when paying tax on your shares?
It means that holding your shares for 12 months can halve the amount of tax you pay on the profits. You can save money by simply holding shares for over 12 months (assuming the shares themselves remain higher or go above your purchase price).
Paying tax on the full profits (when you hold for less than 12 months) needs to be something you think about when you next try to make a ‘quick buck’ in the share market. Often people think the share market is an easy way to make money, however the reality is that no one can ‘time the market’ and on top of that, buying and selling shares quickly results in higher amounts of tax payable to the ATO.
To properly calculate the CGT on shares you should talk with an accredited accountant that knows your full financial position and also a range of other implications that may exist with your investments. This is merely a guide to calculating CGT (capital gains tax) when it comes to shares so you are better informed about how CGT may be calculated in general on share market investments.