“Wash sales” have become a major focus for the ATO — and for good reason. These transactions artificially create capital losses by selling an asset and buying it back shortly after, purely to reduce tax.
Here’s what you need to know to avoid accidentally stepping over the line.
What Exactly Are Wash Sales?
A wash sale is when you:
- Sell an asset (like shares or crypto) at a loss, and
- Buy the same or a substantially identical asset shortly after,
- With the intention of claiming the loss while keeping the same investment position.
The key problem isn’t the sale — it’s the intent behind the sale-and-repurchase.
Why the ATO Cares
Wash sales allow people to stay in the same economic position while generating a tax benefit that wasn’t caused by a real commercial loss.
The ATO sees this as tax avoidance and has explicitly warned investors about wash sale behaviour in:
- Shares and ETFs
- Cryptocurrency
- Managed funds
- End-of-year “tax-loss harvesting” strategies promoted online
Red Flags the ATO Looks At
The ATO looks at behaviour and intent. Warning signs include:
1. Rebuying the same asset immediately
Buying back within days or even weeks can be problematic.
2. Buying a “substantially identical” asset
Even switching to a similar ETF or crypto asset may count.
3. Repeating the same pattern every June
Regular year-end loss selling can attract attention.
4. No genuine commercial reason for the sale
If the only explanation is “to reduce tax,” it may be treated as a wash sale.
Can You Still Sell Assets at a Loss? Absolutely.
Selling an investment at a loss is completely legitimate — markets fluctuate, and investment decisions change.
You just need to have a genuine commercial reason for the sale, such as:
- Rebalancing your portfolio
- Reducing risk exposure
- Getting out of a poor-performing investment
- Changing strategy (e.g., from individual shares to diversified ETFs)
- Freeing up cash for other opportunities
What you can’t do is sell solely for the tax benefit and then immediately buy back the same (or practically the same) asset.
Documenting your reasoning at the time of sale is helpful if the ATO ever reviews your transactions.
What Happens If the ATO Decides It’s a Wash Sale?
They can:
- Deny the capital loss entirely
- Apply penalties, especially if the behaviour appears deliberate
- Charge interest on underpaid tax
For many taxpayers, losing the loss itself is the biggest hit.
Key Takeaway
You’re completely allowed to sell assets at a loss — that’s normal investing. But if the ATO believes the main purpose was to generate a loss while keeping the same investment, they can disallow it.
If you want help reviewing your transactions or getting ready for year-end, we can guide you through what’s safe and what’s risky.
