Tuesday, 9 June 2015

How do you keep track of your share trades?

It's coming up to tax time and normally at this time of year I write a post on how you should start to think about your tax time affairs and start to get your affairs in order.  This year however I'm going to do something different.  I'm going to present a problem that I have...the solution I current use...and see if you have a better solution to this problem.

Problem: I don't have a good system of keeping track of my share trades for tax purposes

One of the biggest problems I have as someone who buys and sells shares is keeping track of the trades for tax purposes.  

It's not that I don't record every transaction that I make - I do and I am meticulous about it.  The biggest problem is working out the tax implication of every sale that I make.
The problem I have is keeping track of working out what is the optimal parcel of shares to sell and the number of shares remaining in the parcel
The problem really exists where you have bought shares over a period of time, either through dollar cost averaging your way into a stock or when you have been participating in a DRP and have been accumulating shares
slowly over a period of time and you then decide to sell a parcel of those shares (rather than the whole holding).

For example assume you do the following:

  1. Buy 1,000 shares of XYZ Limited at $10 per share
  2. Hold the shares over 2 years during which time you get the following DRP shares
    • 2 shares at $10.20
    • 3 shares at $9.00
    • 3 shares at $9.20
    • 3 shares at $11.00
  3. During this period you also bought 500 more shares of XYZ Limited at $9.50 per share
At the end you are holding  1,511 shares in XYZ Limited for an average purchase price of $9.83. 

Assume you then sell 600 shares of XYZ Limited for $9.75...how do you account for the shares that you have sold.  You have a few options
  1. Just pick a large parcel and take remove the shares from this parcel
  2. Attempt to optimise it for tax purposes
If you do option number 1 you are basically losing out from a tax perspective.  If you sell the $10 parcel of shares you are going to be carrying forward a tax loss and you may not want to do this especially if you don't have tax gains to offset this against.  You don't have enough shares in the $9.50 parcel so you're going to have to sell some from the $9.50 parcel and some from the other parcels.

Tax optimising often makes sense.  You sell the number of shares from each parcel which minimizes your total tax obligation (accounting for things like tax discounts etc).  And in the example where you have only traded one share in the year and only own a few shares this is easy.
If you're going to tax optimize for your whole portfolio however there must be a better system!

Solution: Unknown

I don't yet have a solution to the particular problem I outlined above.  I currently use a mixture of excel and trial and error to try and minimize the tax bill I have in any one year accounting for the fact that I will have the above problem with not just a single stock and a single trade but rather multiple stocks and multiple trades.

Do you have a solution?

Do you have a solution / app or program that you use to keep track of your capital gains and tax liabilities.  Do you use this solution in real time or do you just work it all out once the financial year has come to an end?

If I come up with a solution I will definitely let you all know!

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  1. Good point here this is probably something that a lot of people struggle with!

    Could be something to develop i.e. an app if you had the passion for it :) and could validate the idea i.e. see if it's a pain point for a lot of people

    1. Haha I thought about doing something like that. The problem is that it is very jurisdiction dependent.

      If I was an American I would definitely look into it however the smaller market in Australia means I'm not really sure it is worth the effort.

      If someone else decided to build it I would definitely buy it though!

  2. Well I'd still say you could have a decent market, consider it's a subscription service and you have 500K people using it charging $9 per month.. I'm not sure I need to do the numbers for you on that one ;) haha

    You could even use it to branch out into other share trading related services!

    If you're interested in something and can validate an idea, there's always a way to monetize.. I'll use Zig Ziglar's quote, "if you can help enough people get what they want, you'll get what you want", although admittedly/of course this is optimistic :)

    1. Haha I love your optimism Jef!

      The problem is that it's not really clear how big the market is. I did a bit of research on this and the numbers look something like this:

      - 5.98m people directly own shares in Australia (at 2012)...this is amazing

      - The average value of trades reported in 2012 was $12,730...this isn't so good (if you're only trading reasonably small amounts your probably not willing to pay a great deal for a solution...i.e. you're more likely to use excel or soemthing similar)

      - Of the 5.98m people investing directly in the share market ~44% are categorised as Informed Diligents (22%) or Confident Traders (22%) (for definitions see link below)
      - Informed Diligents did on average 10 trades per year while Confident traders did 39 trades per year

      Source: http://www.asx.com.au/documents/resources/asx-sos-2012.pdf

      Working out what percentage of those people are feeling the same pain point I am is quite challenging and even harder is what % of those are feeling enough pain to be willing to pay for a solution.

      I know I have several active investors who read this blog and none have shot me an email to let me know they have the same issue so I'm not sure if there is a solution I'm missing or whether people have come up with their own solutions.

    2. Stator AFM portfolio management software, enter trades as parcels, lets you select parcels to sell in any order to minimise CGT, produces tax reports etc...suprised you done use something like this.