Tax Question and Strategy Question

CactusSpine · 13 October 2011

Say you buy $1000 of XYZ at 20 cents, So you get 5000 worth of shares it goes up to 40 cents a share and you decide to pull out your starting capital of $1000 and leave the profit run, So you only sell 2500 shares do you still pay tax on this $1000?

This is also classed as a strategy where you leave the profit in and move your capital into something new and repeat. I found it a month back on this forum but I can't find it and don't know what it is called.
If you know what this strategy is can you let me know I want to do a bit more reading on it.

Cheers.

KurwaJegoMac · 13 October 2011

Re: Tax Question and Strategy Question.

CactusSpine said:
Say you buy $1000 of XYZ at 20 cents, So you get 5000 worth of shares it goes up to 40 cents a share and you decide to pull out your starting capital of $1000 and leave the profit run, So you only sell 2500 shares do you still pay tax on this $1000?

This is also classed as a strategy where you leave the profit in and move your capital into something new and repeat. I found it a month back on this forum but I can't find it and don't know what it is called.
If you know what this strategy is can you let me know I want to do a bit more reading on it.

Cheers.

Hi CactusSpine,

Even though the amount of capital you withdrew is the same as what you invested, the value of your shares went up (meaning you could sell less shares to reclaim your capital). This is a capital gain.

Regarding the strategy you mention, it's often referred to as 'playing with the market's money'. Not sure if that's the correct name of the strategy though. But you have the gist of it - buy some stocks, wait for the price to appreciate then pull out your initial capital.

investorpaul · 13 October 2011

Re: Tax Question and Strategy Question.

Yes you do pay capital gains tax.

If you buy at 20c and sell at 40c you have made 20c profit.

So if you sell 2,500 shares for $1,000 you have made $500 profit (20c x 2500). You pay tax on this $500

Say the remaining 2,500 shares fell to 10c and you decided to sell these for a total of $250 you would have a loss of $250. This loss of $250 will be recorded on your tax return and used to offset any gains that occured in the year or carried forward to offset any future gains.

The strategy is sometimes called being "free carried".

You originally spent $1,000 you then take your $1,000 out when the price doubles and even if the remaining shares go to zero you technically havent lost out.

alexc2005 · 13 October 2011

Re: Tax Question and Strategy Question.

investorpaul said:
Yes you do pay capital gains tax.

If you buy at 20c and sell at 40c you have made 20c profit.

So if you sell 2,500 shares for $1,000 you have made $500 profit (20c x 2500). You pay tax on this $500

Say the remaining 2,500 shares fell to 10c and you decided to sell these for a total of $250 you would have a loss of $250. This loss of $250 will be recorded on your tax return and used to offset any gains that occured in the year or carried forward to offset any future gains.

The strategy is sometimes called being "free carried".

You originally spent $1,000 you then take your $1,000 out when the price doubles and even if the remaining shares go to zero you technically havent lost out.

How long can you carry a loss for?

bellenuit · 13 October 2011

Re: Tax Question and Strategy Question.

alexc2005 said:
How long can you carry a loss for?

For ever

alexc2005 · 13 October 2011

Re: Tax Question and Strategy Question.

bellenuit said:
For ever

Orly? So if i sold shares right now for a loss. Got out of the share market for 10 years.

Then got back in and made profits. Those profits would be offset by my losses from 10 years ago?

bellenuit · 13 October 2011

Re: Tax Question and Strategy Question.

alexc2005 said:
Orly? So if i sold shares right now for a loss. Got out of the share market for 10 years.

Then got back in and made profits. Those profits would be offset by my losses from 10 years ago?

Essentially yes, unless they change the legislation in the meantime. And it is not just capital gains from shares that you can write off against carry forward losses, you could also write off gains from investment properties, managed funds etc.

Wysiwyg · 13 October 2011

CactusSpine said:
This is also classed as a strategy where you leave the profit in and move your capital into something new and repeat. I found it a month back on this forum but I can't find it and don't know what it is called.
If you know what this strategy is can you let me know I want to do a bit more reading on it.

This strategy is usually practiced on speculative shares that double due to news events. Usually they peak and fall away quickly or have a long drawn out slow demise. You have to ask yourself what gain you have made when this happens as opposed to the hope of a further rise in price of which you have effectively halved your share holding.

You then put your 1k into another company and what? Rinse and repeat? Half your luck.

Alternatively ...
Why not wait for a triple to 60c and then sell 3334 shares for 2k and you have doubled your money while still holding 1666 shares worth 1k while price is at 60c.

So_Cynical · 13 October 2011

CactusSpine said:
This is also classed as a strategy where you leave the profit in and move your capital into something new and repeat. I found it a month back on this forum but I can't find it and don't know what it is called.
If you know what this strategy is can you let me know I want to do a bit more reading on it.

Cheers.

I follow a similar strategy however

I generally look for smaller price moves of around 8 to 15% and generally only remove 70 or 80% of my original capital, then look to re-enter the same stock at another low point in its price cycle...on the second and third entry's i reduce the capital i leave in until the forth entry when its just profit left in, eventually giving me a roughly 30% capital / 70% free carried dividend paying investment.

This way my dividend yield grows by trading and leaving in mostly profit, i then look at the dividends as profit on profit....it can be a slow grind at times but overall my strategy is working.

4 years ago when i started (just before the GFC) i had a portfolio of 4 stocks and now have 23, dividend yield has grown from 4% of my (capital gains excluded) income to 16% last financial year...on target for 20% this financial year...and so far its been a bad year.

I call it 'low cost averaging' because im looking to buy at low points in the price cycle and im happy to have some capital invested in my stocks...its a variation of 'zero cost averaging'

http://thepatternsite.com/ZeroCostAverage.html

http://www.traders.com/documentation/feedbk_docs/1998/04/Abstracts_new/Quinn/Quinn9804.html

CactusSpine · 14 October 2011

So_Cynical said:
I follow a similar strategy however

I generally look for smaller price moves of around 8 to 15% and generally only remove 70 or 80% of my original capital, then look to re-enter the same stock at another low point in its price cycle...on the second and third entry's i reduce the capital i leave in until the forth entry when its just profit left in, eventually giving me a roughly 30% capital / 70% free carried dividend paying investment.

This way my dividend yield grows by trading and leaving in mostly profit, i then look at the dividends as profit on profit....it can be a slow grind at times but overall my strategy is working.

4 years ago when i started (just before the GFC) i had a portfolio of 4 stocks and now have 23, dividend yield has grown from 4% of my (capital gains excluded) income to 16% last financial year...on target for 20% this financial year...and so far its been a bad year.

I call it 'low cost averaging' because im looking to buy at low points in the price cycle and im happy to have some capital invested in my stocks...its a variation of 'zero cost averaging'

http://thepatternsite.com/ZeroCostAverage.html

http://www.traders.com/documentation/feedbk_docs/1998/04/Abstracts_new/Quinn/Quinn9804.html

So_Cynical has hit the nail on the head with the strategy 'zero cost averaging' I stubbled across this not so long back on another post but for the life of me could not remember the name or find it. :bang head:

Thanks all for answering my questions.

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