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Cut your tax bill by selling shares my way

by , 30 October 2013

A couple weeks back a friend of mine came to me biting his nails.

He's relatively new to the world of investing and has had a bunch of winning and a few losing shares.

Although he was happy he was making a profit overall, he was worried the government would take a large chunk of it… in the form of taxes. But there is a solution.

You see, if you time your losing trades properly, you can cut your taxes and increase your returns all in one go! In fact, some might say timing your loss is as important as picking the winners!

But before I explain what you can do, I'd like to show you the different kinds of taxes you can expect to pay on your investments. Because this will not only help you calculate what you need to pay, but will make it easier for me to show you what you can do about it…

The taxman will knock on your door when…
 
The only time SARS will come to collect money on your shares (excluding the dividends) is when you sell them. The system is as easy as that.
 
Even if you have a few shares that flourish with 750% gains, you’ll only have to pay tax when you sell the share.
 
Basically what happens is, at the end of the tax year, SARS will check which shares you sold in the most recent tax year and calculate the tax you owe on them.
 
There’s no avoiding these taxes… BUT, if you know how SARS calculates the taxes you must pay, you can take decisive action to minimise the taxes you’re liable for in the year.
 
How SARS sinks its teeth into your profits
 
In a nutshell, SARS believes people buy shares for two reasons: 
 
The first reason is for buying shares for annual dividend income and long term share price growth. They term this ‘capital assets’.
 
And the second reason is buying shares only for a quick growth in value and then selling again. They call this ‘trading stock’.
 
One quick rule of thumb is the rule of three. It’s simple. If you held a share for three years or longer SARS thinks of it as a ‘capital asset’. If not, SARS sees it as ‘trading stock’.
 
It’s important to know the difference between the two because they tax ‘capital asset’ under Capital Gains Tax (CGT) and ‘trading stock’ under your normal income tax.
 
Let me explain the difference using an example…
 
Capital Gains Tax explained in 30 seconds
 
Let’s say you’re a reader of the Unconventional Millionaire, and bought the tipped share of EOH a little over three years ago. You spent R10,000 at the time, and bought the share at R14.20 each (704 shares), and today they’re worth about R80.50. This means their total worth went from R10,000 to R56,672. But on top of this massive gain you received dividends of 154c for each share.
 
Simply put, if you sold these shares today SARS will recognise these shares as a capital asset. 
 
This is because you held them for over three years.
 
In order to calculate how much CGT you’ll need to pay you can use this formula:
 
i) Selling value of share – Cost of shares = Capital gain
ii) Sum up all the capital gains for the year
iii) Minus R30,000 (You’re allowed a R30,000 capital gains tax exemption every year)
iv) Multiply by 33% (CGT rate)
v) Multiply the number in the previous step by your personal income tax rate.
 
So using the example of EOH… If this was your only share you sold for the year your capital gain would have been R46,672 (R56,672 – R10,000). Take away the R30,000 and it gives your R16,672. Times this by 33% and you get R5,501.76.  If your tax bracket is 35% it would mean you have to pay 35% of R5,501.76 in taxes, which is R1,925.62.
 
Here’s what you can do to minimise your taxes
 
Your portfolio may consist of trading stock and/or capital gains…
 
But at the end of the day you’ll pay taxes on your winning trades.
 
So what you should do is, towards the end of the tax year assess your losing trades you’ve made. You should consider cutting your losses and sell the losers. Because by doing so, you’ll reduce the taxes you’ll need to pay on your winners immediately.
 
But this will work for shares that SARS consider trading stock.
 
Here’s another trick you should consider when selling your shares. If you’ve made it big and had a ton of winners in one year, you don’t have to sell all of them in that year and pay all the tax in one go. 
 
You could sell some in the one year and sell more in the next tax year. By doing so, you’ll spread your tax burden over two years instead of one.
 
So in the end, if you time your losses well, you can reduce your taxes for the year!
 
Thrive in your possibilities,
 
Jonathan Bachrach
 


Cut your tax bill by selling shares my way
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