The discounted cash flow (DCF) method can help you calculate the current value of an investment. DCF can be used to value companies, stocks, and bonds. Keep reading to learn how to use it.
Determining the current value of a stock is a key part of investment research. One method for doing this is the discounted cash flow (DCF) method, which values a stock — or any other investment — based on predicted future cash flows.
The DCF model involves several steps, each calculating different data, to estimate the present value of stocks, bonds, or businesses.
The DCF model relies on the weighted average cost of capital as the hurdle rate. However, you’ll also likely have to calculate a terminal value, intrinsic value, free cash flow (FCF), and a few other metrics before employing the DCF formula. Here’s what you need to know.
How do Investors Determine the Value of a Business?
The discounted cash flow method is one of the best ways of valuing a business.
Investors generally evaluate a business before they invest in it. Luckily, there are several methods to determine whether an investment’s current price represents fair value or not.
They may use comparable financials to identify similar companies in an industry or sector. They may access databases which provide financial information and a value range for companies.
The discounted cash flow method is one of the best ways of evaluating established companies with a good track record of revenue and costs.
However, the discounted cash flow model is quite complex to work with. It involves multiple calculations related to cash flows, rate of return (RoR), equity, and so forth. The discounted cash flow calculation can be used for stocks, businesses, bonds, and other business projects.
Navexa provides a powerful discounted cash flow calculator. You can use this to estimate a stock’s value by inputting key financial metrics — a handy addition to Navexa’s automated portfolio tracking and tax reporting tools for stock and crypto investors.
Introduction to the Discounted Cash Flow Model
Anyone who understands the basics of DCF can use it to evaluate a business.
The discounted cash flow model is helpful in determining a company’s ‘intrinsic’ value. It’s used to determine the value of an investment based on estimated future cash flows. The DCF method is the standard in evaluating privately-held companies, although it could be used for publicly-traded stocks, too.
For many, DCF is a complex mathematical and financial equation, most commonly used by Wall Street experts. However, anyone who understands the basics of DCF can use it to evaluate a business.
The first thing to look into is the weighted average cost of capital (WACC). The WACC represents the hurdle rate for this model, and it’s the minimum RoR required for the project or the investment. Riskier projects have a higher hurdle rate, and vice versa.
Related Terms
These are some of the related terms you should know about if for DCF:
Time value of money — a core principle in finance. This refers to the fact that a sum of money is worth more now than in the future due to its earning potential.
Discount rate — in terms of DCF, discount rate refers to the interest rate used to showcase the current value.
The risk-free rate of return — a theoretical term that refers to interest received from a risk-free investment.
Terminal value — the value of the asset/business/project that goes beyond the forecast period. It assumes the business will have a set growth rate forever. It’s used as an indicator of future cash flows.
Earnings per share — shows the amount of money a company earns for each share. It’s often used for determining the value of a business.
The intrinsic value of a business — observes the value of a business on its own. Represents the present value of all expected future cash flows with an appropriate discount rate.
Internal rate of return (IRR) — a discount rate used to estimate the profitability of an investment.
Net present value of a company — a method of calculating your ROI.
EBIDTA — earnings before interest, taxes, depreciation, and amortization; represents a measure of a company’s overall financial performance.
Formulas You Might Need
Calculating discounted cashflow relies on multiple other formulas.
There are several formulas you might need to perform a DCF calculation.
Time value of money
PV = FV / (1 + r)
Where:
PV is the present value
FV is the future value
r is the rate of interest
Besides the formula, you can use an online calculator to get these numbers if necessary.
Terminal value
(FCF x (1 + g)) / (d – g)
Where:
FCF represents free cash flow for the last forecast period
g is the terminal growth rate
d is the discount rate (usually the weighted average cost of capital)
Earnings per shares outstanding
EPS = net income of company – preferred dividends / common shares outstanding
If the results are above the current cost of the investment, the opportunity will likely result in a positive ROI.
What Can Discounted Cash Flow Tell You?
DCF helps calculate how much money one could receive from the investment if they invested in it today. It’s adjusted for the time value of money, which further helps determine whether future cash flows will be equal to or higher than the value of your investment.
Furthermore, DCF can be used for calculating:
The cost of purchasing an investment
Rental income
Expenses like mortgage, utility bills, cost of debt
Estimated sales proceeds
Where to Find the Necessary Data?
The DCF calculation is highly sensitive to the data used in it.
In order to successfully do the DCF valuation, you’ll need to find specific rates. These are:
The growth rate of the cash flows.
The discount rate that you’ll use to discount future cash flows.
Terminal rate to determine the final value of the DCF.
Growth Rate for Cash Flows
Since the DCF calculation is highly sensitive to the data you enter, it’s best to start within a reasonable range. Check the company’s balance sheet for past growth rates and use those to predict future cash flows. Remember that any number you choose is an estimate, and will affect your final result.
To calculate the growth rate, subtract year 1 cash flows from year 2 cash flows. Then divide the result by year 1 cash flows.
Discount Rate of Return
Next, you should find the discount rate of return for cash flows. To do this, use the WACC method. As we said before, the WACC is fundamental for discounted cash flow calculation.
To get WACC numbers, you should find the cost of debt and cost of equity first. Then, you should calculate the weights of both.
The formula for the weight of debt is:
WD = Total debt / (Market cap + total debt)
The formula for the weight of the equity is:
WE = Market cap / (Market cap + total debt)
Then, you calculate the WACC. The formula goes as follows:
WACC = (E / V x Re) + [D/V x Rd x (1 – Tc)].
Where:
E is the market value of the firm’s equity
D is the market value of the firm’s debt
V is E + D
Re is the cost of equity
Rd is the cost of debt and
Tc is the corporate tax rate.
Lower WACC is considered better than higher WACC.
Terminal Rate
The terminal rate is also one of the key inputs of the DCF calculation. It influences the value you’ll calculate for the future.
If you’re hoping to stay consistent in calculations, you should use the same rate you used for calculating the discount rate, WACC, or the rate at which the company grows.
Now that you have these numbers, it’s time to move on to the DCF calculations.
Value Investments Using the DCF Method: Companies, Stocks, and Bonds
The DCF model is great for evaluating different kinds of investments, including bonds and stocks. Here’s how you can use it to see whether a certain investment is worth its current price.
How to Use DCF to Value a Company?
There are two common methods for working out a company’s future cash flow.
There are certain steps to make to successfully calculate discounted cash flow for companies:
Analyze the income
Determine terminal value
Calculate enterprise value
Include additional assets
Subtract all debt and non-equity claims
Since the DCF model reflects the value of a company’s future cash flows, the first step is to understand and analyze the income of the organization. There are two common methods for this:
Unlevered DCF approach — forecast and discount entire operating cash flows, then add non-operating assets and subtract liabilities.
Levered DCF approach — forecast and discount cash flows that remain available to shareholders after non-equity claims have been deducted.
At a certain point, you’ll stop calculating unlevered free cash flows and move to determine the lump sum or terminal value. The terminal value represents the value of a company beyond the final explicit forecast period. For this, you’ll usually use the estimate numbers.
The next step is to determine the enterprise value. This number represents the value of a company’s operations to all stakeholders.
If a company has any money sitting around, you should include that money into the present value of unlevered free cash flow.
The final step is to subtract all debt and non-equity claims to calculate what’s left for the equity owners.
How to Use DCF to Value Stocks
The DCF method is useful for evaluating stocks.
The DCF method is also handy for evaluating stocks. Here’s how:
Take the average last three years of the company’s cash flow.
Multiply the FCF with the expected growth rate to get the FCF for the future.
Calculate the value of that cash flow by dividing it by the discount factor.
Repeat the process for the next X amount of years to get the net present value (NPV) of the FCF.
Calculate the terminal value of the stock by multiplying the final year FCF with a terminal multiple factor.
Add the values from steps 4 and 5 and adjust the total cash and debt (find these in the company’s balance sheet) — this gives you the market value of a company.
Divide the market value of a company by the shares outstanding to find the intrinsic value per share.
How to Price Bonds with DCF?
Determining the fair value of the bond involves calculating the bond’s cash flow.
Finally, you can use DCF to value bonds, as their price is based on a model close to the DCF one. Typically, determining the fair value of the bond will involve calculating the bond’s cash flow (current value of a bond’s future interest payments) and its face value (the value of a mature bond).
Both these values are fixed, which helps you determine the bond’s RoR.
Here’s what to look at:
Maturity date: Short or long-term, when reached, the bond’s issuer must repay the bondholder the full bond value.
Discount rate: Interest payments that go to the bondholder, usually a fixed percentage of the face value.
Current price: Bond’s current value, dependent on several factors such as market condition.
Pricing a bond is relatively simple, and can be done in the following way:
Calculate face value, annual discount rate, and maturity date
Collect the basic information about the bond; face value, on-par value, and the bond’s annual coupon rate. Also, note the maturity date. You’ll need these numbers to continue the DCF valuation method.
Calculate expected cash flows with the formula:
Cash Flow = annual coupon rate x face value
Discount the expected cash flows to the present
Cash Flow ÷ (1+r)^t
Where:
r is the interest rate
t the number of years for each cash flow
Value individual cash flows
To calculate the cash flows, use the following formula for each year:
Includes all major assumptions about the company/project
Determines the intrinsic value of a business
Includes all future expectations about the business
Suitable for analyzing mergers and acquisition
Can be used to calculate IRR
Limitations of the DCF Model
The main cons of this model:
Involves a large number of assumptions
Prone to errors
Too complex for novice investors
Sensitive to changes in assumptions
Isolates the company’s value
Doesn’t include competitor’s value
Terminal value TV is hard to estimate
WACC is hard to estimate
Is DCF the Same as Net Present Value?
Even though these two methods are related, the DCF is not the same as net present value (NPV). NPV is actually the fourth step in calculating the DCF. It’s used to deduct the upfront costs of the investment from the investment’s DCF.
Final Word On The Discounted Cash Flow Model
The Navexa portfolio tracker provides an automated discounted cash flow valuation calculator.
The discounted cash flow valuation method projects a series of future cash flows and earnings, which it discounts with the time value of money. It’s one of the best ways to assess the present value of stocks, bonds, or businesses.
The DCF method is most suitable for experienced investors since it’s complex.
So, now you know how to analyze a potential investment’s value using the discounted cash flow method. And, since you’ve landed here on the Navexa blog, we have good news:
You can skip the complex calculations by using the automated discounted cash flow valuation calculator we’ve built into Navexa.
Navexa is a portfolio performance tracking and tax reporting platform that allows you to track your stocks and cryptos together.
Discover the twelve key metrics investors use to assess dividend-paying stocks and the companies behind them.
Investing in dividend stocks is one of the proven, long term methods of building wealth and passive income. Investors can enjoy compounding investment income for many years, and even build enough income that they can live on dividend yields alone.
Researching dividends can be a complex process. So in this post, we’re going to walk through 12 of the key metrics investors can use when analyzing a dividend paying stock or company.
Dividends: The Basics
Dividends are a company’s payments to its shareholders. Many investors prefer to hold dividend stocks, since they can collect cash dividend payments, or collect additional shares through dividend reinvestment programs.
There are different types of dividends available to shareholders:
Cash dividend — the company shares a portion of its net income with shareholders.
Stock dividend — instead of paying cash, the company issues more shares.
Property dividend — the organization offers its assets to shareholders.
Liquidating dividend — not taxable, the company pays it from liquidating its assets.
Special dividend — contains additional cash profit, and is higher than regular dividends.
Interim dividend — paid before issuing the actual dividend.
Dividend stocks are sometimes less volatile than growth stocks. This can make them preferable for investors with lower risk tolerances.
Dividends are often paid quarterly, but some companies pay them out annually. A consistent dividend payout might be a sign of a healthy company, but that’s not always the case.
Companies might sometimes offer high dividend yield to entice further investment, when in reality, the business is failing. This is called the dividend trap.
This is why it’s crucial to learn how dividends work, and understand how to analyze the key metrics of dividend-paying stocks.
How do Dividend Stocks Work?
Income investors look for stocks that pay a portion of their profits in dividends.
These types of stocks can deliver returns in two ways:
Dividend income from dividend payments
Growth of the stock price
Additionally, the dividend payouts can compound when they’re reinvested into shares. Stocks can pay dividends despite the share price fluctuating.
Investors can use the money to:
Reinvest in the shares of the same company
Buy stocks of different organizations and diversify the portfolio
Save the money
Spend the money
Dividend Investing: How to Start
Dividend investing means buying stocks because they pay out regular dividends. Investors seek these stocks by looking for companies that offer stocks with a stable, regular dividend payout.
The usual steps of investing in dividend stocks include:
Opening a brokerage account — best and fastest option is opening the account online.
Funding the account — verifying the identity, and connecting the bank account usually lasts a few days.
Buying the right stock — this decision should be based on knowing the investment goals and proper research.
Collecting the dividend yield — once someone holds the stocks for a certain time, they’ll receive the first dividend payment.
Top 12 Key Metrics for Dividend Stock Analysis
Researching dividend stocks involves different layers of company and share price analysis.
There are many metrics to follow in dividend investing. These help to build an understanding of how well the company operates, how stable its earnings are, and possible future growth.
Dividend Payout Ratio
The dividend payout ratio is one of the most common financial ratios investors check. It measures how much of a company’s earnings (after tax) is paid out in dividends. It also shows how stable the dividends are and how much the business is growing. High dividend payout ratios tend to be regarded as riskier — since most of the company’s earnings go into dividends, they might not be sustainable.
Dividend payout ratio is calculated by dividing dividends paid by earnings after tax, and multiplying the result by 100.
Free Cash Flow
Investors can see the business’s cash flow from the company statements. Free cash flow shows how much expenditure a company has and how much free cash remains to be given to shareholders through dividends. The better the free cash flow, the more cash is available for dividend payouts.
Free cash flow is calculated using three factors:
Operating cash flow
Sales revenue
Net operating profits
Return on Invested Capital
Shareholders will usually invest in companies that can grow their capital quickly. Return on invested capital is a similar measurement to return on equity, only it shows a company’s return on both equity and debt.
It’s calculated by dividing the net operating profit after tax by the amount of invested capital.
Operating Profit Margin
The company’s operating profits show the earnings before interest and taxes. The operating profit margin is a ratio of income to profits from sales. The higher the ratio, the stronger the dividend income prospects (in theory).
The operating profit margin is calculated by dividing the operating income (earnings) by sales (revenues).
Asset Turnover
This is a less known financial ratio, but still equally important as others. It measures how many dollars of sales were generated by each dollar of assets. Organizations that have more sales usually generally offer stronger returns.
This metric is calculated by dividing net sales (revenue) by the average total assets.
Sales Growth
Using a dividend reinvestment plan, investors can compound their holdings by accumulating additional shares.
Sales growth is one of the best metrics to see whether the company has a good business model driving higher revenue. Good sales growth trends show potential for growth.
It’s calculated by first subtracting net sales of the previous period from the current period. Then, the result should be divided by the net sales of the previous period and multiplied by 100 for a percentage.
Net Debt-to-Capital
Businesses also go into debt. This is why net debt-to-capital is crucial for understanding how the organization deals with its finances. Overall, a net debt-to-capital ratio below 50% is considered good.
This metric is calculated by dividing the company’s net debt by its capital.
Net Debt / Earnings before interest, taxes, depreciation, and amortization (EBITDA)
EBITDA compares a company’s debt to its earnings. It’s often used to compare different businesses. Net debt divided by EBITDA shows how many years the business will take to eliminate debts with cash on hand and annual cash flows.
Price-to-Earnings Ratio
P/E is another popular calculation to know. It divides a company’s stock price by the earnings per share, revealing to the market how much the company is worth. In general, the P/E ratio of less than 20 is considered good.
Total Shareholder Return
TSR helps investors observe both the stock price and dividend yields. It accounts for both the price and the dividends paid. It’s a way to see where a stock sits relative to the wider market.The formula is:
If you want to see how your investments are really performing, you must factor in portfolio income. Navexa makes it easy to see your complete returns for all your stocks and crypto.
Dividend yield
Dividend yield represents the percentage of annual dividend payments to shareholders. This number shows what the investor can expect to get in the future from the stocks they hold, if the dividends remain the same. However, the dividend yield can change over time, depending on the market conditions and company developments.
This metric is calculated by dividing cash dividend per share by the current price per share. To get the percentage, multiply the result by 100.
Dividend Growth Rate
Besides looking into dividend yield, investors also observe the dividend growth rate. This metric shows how much a dividend has increased each year. Those businesses that offer an annual dividend increase could be more appealing.
A steady, long-term increase in dividends shows that the company is (in theory) generating enough cash flow to fund that growth. The formula for dividend growth rate is:
Dividend Growth Rate = (D2/D1) – 1
What Is Considered a Good Dividend Payout Ratio?
Dividend payout ratios between 30% and 50% are generally considered healthy.
Investors often look for the best possible dividend payout ratio. Overall, a ratio of 30% to 50% is considered healthy. Payout ratio numbers above 50% may appear unsustainable.
Additionally, the dividend payout ratio varies from industry to industry. For example, you might notice different dividend yields in the tech sector versus among utility companies.
How Are Dividends Taxed?
In Australia, investors must pay taxes on both capital gains and dividends.
However, companies pay out dividends that have already been subject to taxation. Australian laws recognize that shareholders shouldn’t be taxed again on the same profits, so investors receive a rebate for the tax that companies have paid. These dividends are known as “franked”. They also have a tax credit.
On the other hand, ‘unfranked’ dividends don’t have a tax credit, as the company didn’t pay taxes for them, so investors will have to.
The financial year in Australia goes from July 1 to June 30. This is the period when shareholders should collect all the financial information and go through an assessment.
In Australia, dividend reinvestments are treated the same as cash dividends. This means that if you receive shares instead of cash, you’ll still need to pay taxes.
If you struggle to calculate portfolio gains for the fiscal year, Navexa is here to help. Once you upload your portfolio, Navexa’s taxable income reporting tool automatically calculates your obligations and provides a detailed breakdown for reporting purposes.
What’s more, you can download this data in XLS or PDF and easily report your capital and other gains.
What Is a Good Dividend Strategy?
Some investors time their buying and selling based on a stock’s dividend activity.
Dividend strategy refers to planning around when to buy and sell shares in a dividend-paying stock. The dividend capture strategy is one of the common ways investors get into dividend stocks.
To do this, investors keep track of the dividend timeline:
Declaration date — when the company announces dividends.
Ex-dividend date — when the stock starts trading without the value of the dividend.
Date of record — when current shareholders receive dividends per share.
Pay date — when dividends are paid.
In this strategy, the best moment to purchase the stock is right before the ex-dividend date. Then, investors would receive the dividends, and sell the shares right after they’re paid. The main purpose of buying and selling is to get the dividend, then exit the position.
This is the opposite of long-term investing, where the investor keeps the stocks and allows for compound growth.
What Is Dividend Analysis?
Dividend analysis is when investors to analyze dividend-paying stocks over a long period. The data is presented in graphs and shareholders can easily see if the company pays regular dividends per share, and if it increases them. Dividend analysis also shows how sustainable dividend payouts are for the company based on current earnings.
Pros and Cons of Dividend Investing
Many investors get into dividend stocks to boost their passive income through dividend yield. Still, there are some pros and cons to consider when it comes to investing in dividends.
Pros:
Great source for passive income.
Dividend stocks may be less risky than smaller, speculative companies.
Long-term dividend stocks may be relatively stable.
Many ways to utilize the annual dividend per share.
Cons:
Investors need a lot of capital to create significant income.
The business may change the dividend policy.
Dividend taxation may confuse new investors.
Requires careful research.
Navexa’s portfolio tracking platform automatically tracks all dividend income, reinvested dividends, and breaks down how it impacts a portfolio’s performance.
Final Word On Key Dividend Metrics
Investing in dividend stocks can be a solid strategy — or part of a strategy — for building long-term wealth in the stock market. However, experienced dividend investors know there’s more to it than just picking out the first company they come across.
The dividend payout ratio is one of the most important metrics to consider. The other 11 metrics we’ve detailed here are also important in analyzing a dividend stock. These key metrics can help to analyze not just the stock price, dividend yield, or payout ratios.
They also tell a story about how the company operates and whether purchasing a specific stock could provide a long-term dividend yield or perhaps indicate a dividend trap.
Keep in mind that dividend investing carries both risk and tax obligations. This is where Navexa can help.
We’ve built a powerful automated tracking tool that allows you to track all your stock and crypto performance in one place. Navexa tracks and records all dividend income and calculates its impact on your total performance.
At tax time, our Australian customers can run automatic reports to calculate and optimize both their CGT and taxable income activity.
Sign up for free today and test out Navexa’s powerful automated investment performance tracking and tax reporting tools.
Compound annual growth rate, or CAGR, is one of the key methods for calculating investment performance. Here’s how to calculate it manually — and a fast way to automatically see an investment’s compound annual growth rate.
CAGR, or compound annual growth rate, is a method investors use to measure the annual growth rate of an investment. Generally it’s only used for portfolios that compound their growth by generating income which is in turn subject to capital appreciation.
While it’s not the only method of determining an investment’s long-term annual returns, it is one of the most popular. As we’ll show in this explainer, CAGR has advantages and disadvantages — which is why the Navexa portfolio tracker allows you to compare CAGR-measured performance with other calculation methods.
What Is Compound Interest?
To understand CAGR and its possibilities, you should first understand how compound interest works. Compound interest is what happens when money accrues interest, and that interest then accrues more, and so on. Basically, it’s an interest you earn on interest.
On the opposite end, there’s simple interest. This type of interest represents financial gains an investor earns just on the principal portion of the loan or their initial investment. In other words, simple interest is limited to one earning cycle — it leaves out interest earning more interest.
Compound interest is what happens when money accrues interest, and that interest then accrues more.
Definition of Compound Annual Growth Rate
Compound annual growth rate is defined as the rate of return required for an investment to grow from its starting balance to the ending value. It’s used when profits are reinvested at the end of each period.
With CAGR, investors can compare the present value of two or more stocks, and see which one has performed better over a certain timeframe.
CAGR calculates past performance. Furthermore, the compound annual growth rate isn’t the same as the true rate of return. Instead, CAGR is a metric used to determine how an investment may perform in the future, based on past performance.
Investors use CAGR as an estimate, rather than the exact measurement of the portfolio performance. It’s important to understand that neither CAGR, nor any other performance calculation methods, are any guarantee of future performance.
Other Growth Metrics to Know
Here are some other metrics investors use to help measure their journey.
Year-over-Year (YoY) Growth compares the changes in annualized metrics at the fiscal year-end date.
Month-over-Month Growth (MoM) compares the changes in the value of a metric at the end of the current month compared to the past month.
Last Twelve Months (LTM) is the timeframe of the immediately preceding 12 months, often used to evaluate a company’s performance.
Reinvestment Rate is the expected return that occurs after the reinvestment of the previous gains.
What Is CAGR Used For?
The CAGR is used to calculate an investments’ performance when compounding gains, or interest, are taken into account. It presumes profits or income will be reinvested, and gives a representational figure, which, as you’ll see shortly, has benefits and limitations as far as understanding performance.
CAGR is useful for understanding long-term performance in that it smooths out the effects of volatility. If an investment is up 10% one year and down 5% the next, then up 4% the next year, CAGR shows the long-term trend.
CAGR presumes profits or income will be reinvested, and gives a representational figure
Benefits and Downsides of CAGR
There are many advantages of using the compound annual growth rate formula:
It’s one of the most reliable ways of calculating ROI for compound interest.
Helps compare stock performance in different time periods.
Can be used for each investment separately.
Fixes the limitations of the average return calculation.
Works better for short-term calculations.
Some of the CAGR calculation’s limitations:
Doesn’t account for investment risks.
Implies a constant growth rate, which is not always the case.
Can’t be used to measure the profitability of an asset’s inflows and outflows.
Ignores market volatility.
CAGR Formula
To calculate CAGR, investors divide the value of the investment at the end of the period of time (EV) by the value of the investment at the beginning of the period (BV).
The next step is to raise the result to an exponent of 1 divided by the number of years (n).
Then, subtract one from the result.
To get the percentage, investors multiply the result by 100.
The complete formula looks like this:
CAGR = (EV / BV) ^ 1/n – 1 x 100
Modification of the CAGR formula
Investors have to modify the CAGR formula to get the correct data on their investments.
They need to know how long they’ve been holding a particular asset. To get this number, investors calculate how many days they held an asset for the beginning and the end of the period, then take into account all the other “complete” years, shown in days.
For example, someone held the investment for 300 days during the first year, plus three years (equals 1,095 days), then exited the position after 200 days in the last year. Their total holding period is 300 + 1,095 + 200 = 1,595 days.
To get the years, divide by 365, which makes 4.369.
They can then use this number in the CAGR formula, where n = 4.369
CAGR Calculated via Excel Spreadsheet
Some investors like to track their stock performance via an Excel spreadsheet. It’s possible, but not as easy — Excel requires that they use “RATE” (used for calculating the rate of return), and the “COUNTA” function (counts the number of years) to get the desired value.
However, there’s an easier way to calculate compound annual growth rate, using the CAGR calculator online.
CAGR Calculator
An online calculator is a simple solution to calculate an investment’s compound annual growth rate. Online calculators are straightforward, and investors get results immediately.
But, if you don’t want to deal with any calculations, Navexa is here to help.
Navexa: Automatic CAGR Calculations
Sometimes, calculating CAGR requires collecting a lot of data from your portfolio. The Navexa portfolio tracking platform can calculate investment performance using multiple formulas. Just upload your portfolio, and Navexa will do all the work for you.
Once you finish uploading your holdings, you can toggle between “Simple” and “Compound” and the platform will provide you with detailed performance metrics.
With Navexa, there’s no need to question whether the CAGR calculator is correct. You’ll get the data instantly within the app, so you know how your portfolio performs.
Example of CAGR Formula
If you’re still struggling to understand how compound annual growth rate works when using a formula, here’s an example.
Let’s say a company has a revenue of $100 million at the end of year 0.
Three years from then, the company is projected to reach a revenue of $150 million.
To start calculating, you should ignore the initial year (year 0), as the formula only takes into account the compounded revenue. To get the initial balance, subtract the beginning period (year 0) from the ending period (year 3).
Proceed to enter the following data into the compound annual growth rate formula:
Beginning Value = $100 million
Ending Value = $150 million
Number of Periods = 3 years
In this case, the annual growth rate CAGR formula looks like this:
CAGR = (150 million / 100 million) ^ 1/3 – 1 x 100
Based on this example, the compound annual growth rate is 14.47 %
CAGR vs. IRR
CAGR shows the return of an investment over a specific time period. However, there’s one more calculation you should know about — the Internal Rate of Return (IRR).
IRR also measures growth rate and performance, but in a more flexible way compared to CAGR.
One of the key differences between CAGR and IRR is that CAGR is used for simple calculations. Additionally, investors can calculate CAGR by hand, or with a CAGR calculator.
IRR, is used to show the growth rate of complex investments. IRR is used with portfolios with various cash inflows and outflows. If you want to measure IRR, you’ll likely need a powerful calculator or an accounting system.
IRR is often used for an investment that can’t be managed with a CAGR calculation.
CAGR shows the return of an investment over a specific time period. IRR also measures growth rate and performance, but in a more flexible way compared to CAGR.
CAGR vs. AAGR
Average Annual Growth Rate (AAGR) is another performance calculation. While CAGR accounts for the compound annual growth rate, AAGR doesn’t. Instead, it’s a linear measure that shows the average annual return.
What is Risk-Adjusted CAGR?
The risk-adjusted formula helps the investor determine whether a certain investment is worth the risk. With this method, investors measure and compare the generated returns and risks. This gives them an idea of the potential ending value of their portfolio.
Risk-adjusted CAGR requires a bit more calculation, and is more advanced. This is because it takes into account the standard deviation figure — a measure of volatility, which is different for every asset.
Calculating risk-adjusted CAGR is done by multiplying the CAGR by 1 and subtracting the standard deviation. In case the volatility number is 0, CAGR remains the same. However, with a higher standard deviation, CAGR gets lower.
This formula helps investors compare multiple investments and decide which one can provide the highest likelihood of returns for the desired time period. Again, no calculation method is ever going to protect against investment risk or predict future performance reliably.
How Investors Use CAGR
There are many ways to use CAGR in investing. The first is to determine the rate of return and likely future value of an investment.
Additionally, CAGR helps investors set objectives and calculate the rate they need to successfully grow their investment. This is especially true for risk-adjusted CAGR. This formula includes the risks related to a specific investment, which helps determine future growth rates.
The CAGR formula is also an ideal way of comparing multiple investment opportunities. Using it to forecast future value helps investors make strategic decisions.
The Importance of CAGR for Companies
Investors aren’t the only ones calculating growth rates and dealing with CAGR. Business owners and CEOs also utilize CAGR to determine company performance.
Finally, CAGR is crucial for companies that plan to give out dividends to shareholders, as it shows the company’s (positive or negative) performance between two different years.
What is Considered Good CAGR?
Generally speaking, a CAGR of 15% to 25% for the period of five years would considered a good compound annual growth rate for stocks and mutual funds.
However, if the CAGR were lower than 12% for stocks and mutual funds, investors might gravitate towards other opportunities, such as real estate or other securities.
See Your CAGR & Simple Returns in Navexa
Compound annual growth rate (CAGR) is one of the methods investors measure the performance of their holdings. The formula is fairly simple, but it doesn’t account for market volatility and investment risks, unless you use a risk-adjusted one.
The CAGR formula can only be used for compounding investments. Compound annual growth rate is different from AAGR, which simply shows the average change for one year. Many investors prefer CAGR since it smoothes out the year-by-year volatility in growth rates.
Among many other features, Navexa also offers CAGR calculations based on uploaded portfolio data. Simply toggle between ‘Simple’ and ‘Compound’ to get accurate data instantly. To check out how it works, register today and start your free trial.
Time-weighted return is one of the most popular ways of measuring investment performance and calculating returns. We explain how to calculate TWR and explore other key methods of tracking portfolio performance.
It can be challenging for investors to find the best method of measuring portfolio performance and investment returns. The time-weighted return is on of the most common ways of doing so.
Besides a simple rate of return, there’s the time-weighted return (TWR) method. It’s among the most common formulas used to track investment performance. In short, it accounts for moments when cash flows occur, and creates sub-periods to help investors track growth rates.
Keep reading to learn how bankers, investment professionals, and portfolio managers use a time-weighted rate of return to evaluate investment performance.
Impact of Inflows and Outflows of a Portfolio
Cash flows are vital to time-weighted returns
Before diving into the time-weighted return, it’s crucial to understand cash flows. Cash flows are an important part of calculating portfolio performance. They also make a difference in which method experts use, because each performance calculation treats inflows and outflows differently.
Cash flows, or inflows and outflows, represent the total money transferred into and out of one’s portfolio — deposits and withdrawals. The example of inflows includes proceeds from the selling the asset. Outflows can be payments for buying a stock.
Cash flows can be used to define a sub-period, and the method that will be used to calculate the rate of return — the money-weighted rate of return, or time-weighted rate of return formulas.
If someone invested money and never made any withdrawals from their portfolio, calculating the rate of return on their investments would be easy. Any method would give the same result, since there were no outflows and inflows to observe across the sub-periods.
Still, this rarely happens in practice, and cash flows are always present. Investors may make changes in their portfolios daily, and calculating the weighted rate of return can be challenging. Since each method (TWR, RoR, MWRR) handles these cash flows differently, each will give a different performance number.
Here’s what you should know about the time-weighted return.
What Is the Time-Weighted Return?
Time-weighted returns are one measure of compound growth.
Time-weighted return (TWR) is a method of measuring the compound growth rate of one’s portfolio. This method is designed to help investors eliminate the distorting effects of deposits and withdrawals.
TWR breaks up the investment performance into sub-periods, based on the moment when the money was added to, or taken out of, the account. Then, it provides the rate of return for each interval with cash flow changes.
Is Time-Weighted Return Correct?
By isolating the intervals based on these inflows and outflows, TWR provides more accurate numbers than simply subtracting the beginning balance from the final value of the portfolio.
Additionally, the time-weighted rate of return formula multiplies the returns for each sub-period, links them together, and shows how the returns have compounded.
The time-weighted rate assumes all gains are reinvested in the portfolio.
This method is also more commonly used by fund managers, or bankers, and not private investors. This is because fund managers usually don’t have control over cash flows, but still need some way to calculate portfolio performance and returns for their clients.
Can Time-Weighted Return Be Used to Compare Investments?
Some experts argue that TWR shouldn’t be used to compare investment performance, and that the money-weighted rate of return formula (equal to IRR) is a better measurement for comparison. This is mainly due to the complexity of its formula, which is not ideal for regular investors.
However, TWR remains preferred among fund managers and finance experts who don’t have control on the cash flows in the portfolios they manage.
Time-Weighted vs. Basic Rate of Return
The rate of return is one of the simplest ways of calculating the rate of return over a certain period. RoR is shown in percentage and represents the change from the beginning of the holding period until the end.
RoR is not always an accurate measurement, since it doesn’t account for cash flows. However, the time-weighted return calculation is there to eliminate the effect of cash flows, and create intervals based on when the money was added or withdrawn from one’s portfolio.
By isolating each time period, TWR provides more accurate results. In practice, the sub-periods between cash flow events are treated as constituent performance units, which are then combined to give the total performance for the overarching period.
However, there’s another method to compare it with.
Time-Weighted vs. Money-Weighted Rate of Return
Money-weighted rate of return accounts for timing and size of a portfolio’s cash outflows.
Money-weighted rate of return (MWRR), which is equal to an internal rate of return (IRR) is another performance measurement method.
While the time-weighted method factors in the moment of change, creates the period for each change, and calculates period return, MWRR accounts for both the timing and sizes of cash outflows, such as:
The cost of a purchased investment
Withdrawals
Reinvested dividends
It also accounts for inflows:
Received dividends
Deposits
Sale proceeds
Contributions
The key difference between TWR and MWRR is that MWRR doesn’t create time periods based on cash flows like the TWRR. This means that any cash flow within a time period can impact MWRR. If there’s no cash flow, both methods should provide similar results.
Money-weighted rate of return is a more complicated, but more accurate measurement of investment performance. This is also the most appropriate way to measure the return on investment.
The Importance of the Time-Weighted Return
Since the time-weighted return is based on cash flow, but used to calculate the period return for each interval, it’s usually used as a reflection of the investment strategy. Investors find it’s easier to calculate returns once the performance is broken down into sub-periods.
The TWR method helps them further isolate cash flows for each period and gain more accurate results. Plus, the TWR multiplies each sub-period, and shows how the returns compound over time.
This performance method is crucial for investment managers, since they don’t have control over cash flows in the portfolios they manage.
What Does the Time-Weighted Return Tell?
Since TWR is used to generate sub-periods and link them, it’s one of the best methods to see how the returns compound over time. When calculated correctly, TWR also shows the results of an investment strategy. It strips the impact of cash flows, and reveals pure investment performance.
How to Calculate Time-Weighted Return
Investors and fund managers who calculate time-weighted return start by calculating the rate of return for each sub-period. This is done by subtracting the ending balance from the initial value.
Then, they divide that difference by the initial value of the holding period.
The key is to create a new sub-period for each cash flow, and calculate the RoR for each of these.
Investors then add “1” to each of the return amounts. This simplifies the calculation of negative return numbers, and assures the formula works correctly.
Then, they multiply the rates of return for each sub-period, and subtract “1” to yield the time-weighted return.
TWR Formula
TWR = ((1+HP1) x (1+HP2) x (1+HPn)) – 1
TWR = Time-Weighted Return
HP = (End Value – (Beginning Value + Cash Flow)) / (Beginning Value + Cash Flow)
n = Number of Periods
HPn = Return for sub-period n
In addition to the basic TWR formula, two other calculations can clarify the portfolio performance — Simple and Modified Dietz methods.
Simple Dietz method
Since TWR doesn’t account for cash flows that likely occur during the holding period, the Simple Dietz method can be used to address this. This method assumes that cash flows occurred either at the beginning, middle, or the end of the measured periods (day, month, or year).
It compensates for external cash flows. The formula is:
R = B – A – C / A + C/2
R = rate of return,
A = beginning market value
B = ending market value
C = net external inflow during the period
Modified Dietz Method
The Modified Dietz Method is the most common way of calculating time-weighted returns.
The Modified Dietz method is also the most common way of calculating TWR. However, it’s not perfect, and may skew the results in certain circumstances.
Issues with timing
One of the main issues with calculating portfolio performance is the assumption that all transactions happen at the same time within each sub-period. If the sub-period is one day, we calculate the data as if all transactions happen at the beginning and end of the day.
This can lead to errors, as sometimes the change in the portfolio is equal to zero and we can’t apply some formulas. In such cases, experts would have to further adjust the Modified Dietz method for better results.
Issues with negative or zero capital
The average capital is usually positive. However, if a larger outflow occurs, the average capital could go to zero or become negative. This can cause the Modified Dietz calculations to show a negative balance when there’s an actual profit, and vice versa.
One of the solutions is to catch a moment when the outflow happens, account for it, and use the simple returns calculation for specific period returns.
Excel Sheet
Some fund managers like to use Excel to calculate the time-weighted return. They either download an existing template, or use formulas in the sheet.
Others create their own Excel sheet. They enter the portfolio data manually, starting with the beginning and ending values for each period. Then, they calculate the return for each of the sub-period.
To get to the TWR, experts should add 1 to each of the results (to mitigate the negative returns), use the geometric mean function, and finally subtract one at the end. Excel can then turn it into a percentage form.
Automatically Calculating TWR With The Navexa Portfolio Tracker
If you’re looking for an easier way to get the accurate time-weighted return, the Navexa portfolio tracker uses a version of the Modified Dietz method. Our performance calculation accounts for the performance of assets, and the size, and frequency of cash flows for each sub-period.
This provides a clear idea actual investment performance. Simply upload the portfolio data you need to track, and Navexa will calculate the returns. Plus, the tracker will also annualize the numbers for an easier overview.
Navexa does so using live market data from the ASX, NASDAQ, NYSE and global cryptocurrency markets, displaying intra-day pricing and performance.
Advantages of the Time-Weighted Return
There are several advantages to the time-weighted return method. It:
Is a solid indicator of investment performance,
Eliminates the impact of cash flow,
Provides a clear picture of returns after each deposit/withdrawal,
Is suitable for measuring investment managers’ performance,
Links periodic returns.
Disadvantages of the Time-Weighted Return
Due to the complex nature of investing, TWR still has some disadvantages. This calculation can turn out to be challenging when the money moves in and out of the portfolio more often. The common changes may skew the final number, and provide less accurate results.
Additionally, the TWR doesn’t measure how long the money has been invested, or when it was invested. This is why some investors may prefer IRR instead.
TWR is often used to track performance month over month. However, using the TWR is tricky if there’s an increased cash flow occurring within each month or day.
Examples of Using the Time-Weighted Return
The best way to understand how the time-weighted rate of return works is through an example. Let’s say that an investor has the portfolio of this value:
Dec. 31, 2011 — $100,000
Jan. 31, 2012 — $110,000
Apr. 30, 2012 — $103,000
Nov. 30, 2012 — $120,000
Dec 31. 2012 — $135,000
This makes four time periods we should observe:
Dec. 31, 2011 to Jan. 31 2012 (HP1)
Jan. 31, 2012 to Apr. 30 2012 (HP2)
Apr. 30, 2012 to Nov. 30, 2012 (HP3)
Nov. 30, 2012 to Dec 31. 2012 (HP4)
Additionally, this person made a $12,000 withdrawal on March 3, 2012 (occurred during HP2) and a $20,000 deposit on December 20, 2012, (HP4).
Now we should calculate the holding period return for each period:
To get to time-weighted rate of return, we should now add 1 to each of the period results and multiply them together, then subtract one:
( (1 + 0.100) x (1 + 0.0455) x (1 + 0.1650) x (1 + 0.0417) ) – 1 = 0.2840
To get a percentage, multiply the result by 100, which equals 28.4%.
The Navexa Portfolio Tracker automatically tracks portfolio performance using the Modified Dietz Method and money-weighted return calculation.
Summary: Time-Weighted Return Calculation
The time-weighted rate of return is a great method of measuring portfolio performance. It’s a preferred method among financial experts, bankers, and fund managers. The TWR formula focuses on time periods when cash flows occurred, and helps experts calculate growth for each period.
Time-weighted return is considered a standard in portfolio management, but still has some flaws. But by adjusting the calculation, fund managers and investors can overcome these issues, and measure growth correctly.
A money-weighted return, on the other hand, measures compound growth in the value of all funds invested in a portfolio over the evaluation period.
Navexa is one of the easiest tools to use for understanding your returns and portfolio performance. Our advanced performance calculation utilizes the Modified Dietz method.
Not only that, but when you track your performance in Navexa, you can examine performance at both the portfolio and individual investment level, and toggle between simple and compound returns in a single click.
Your guide to calculating capital gains tax in Australia in 2022. From tax rates, CGT events, taxable income and more. Plus, discover four key tax reporting strategies investors use to adjust and optimize their total taxable capital gain.
Paying tax is a part of investing. It has long been a fact of life that a significant portion of our earnings will always be earmarked for payment to the state. This includes capital gains.
Tax is applied to a wide range of earnings including wages, salaries, and investment income from property, shares, and cryptocurrency.
In Australia, the tax rate that is applied to your investment income is known as the Capital Gains Tax, or CGT.
Whether you’re a seasoned investor or just starting out, it’s important to be aware of how CGT works. This article will explain how the CGT works, and how to calculate and report your capital gains in Australia in 2022.
While you can’t avoid paying CGT on your investment income, there are some strategies you should be aware of for minimizing the impact of tax on your capital gains. This blog post examines some of these strategies and provides examples of how they might look.
The Australian tax year, or financial year, runs from July 1 to June 30. This is the period for which you will need to submit your tax assessment based on any income you received during the financial year. This period is known as ‘tax season’.
How Does CGT Work?
The Australian Tax Office (ATO) requires individuals to declare investment activity in their tax return and pay tax on all investment earnings, including capital gains and dividend income.
If you buy shares, invest in property, or hold other investments which you sell at a higher price than what you bought them for, you will have made a capital gain. This means you will be paying CGT.
CGT is the tax rate that is applied to net capital gains (total gains minus total losses). It is not a set rate, but is calculated according to your marginal tax rate. This is the tax rate that you usually pay on your personal income, and will be the tax rate applied to your investment earnings.
Capital gains are taxed at an individual’s marginal tax rate
While CGT rates for individuals vary according to their marginal tax rate, flat rates apply for companies and self-managed funds.
Trading companies pay 26% if their annual turnover is less than $50 million, and if it exceeds $50 million, the CGT applied is 30%. Investment companies don’t qualify for the 26% rate and are taxed at 30%. Self-managed super funds are taxed at a lower rate of 15%.
If you sold any assets during a financial year, you will need to work out your capital gain or capital loss for each asset. CGT will need to be paid on your net capital gains.
To calculate your capital gains, you first need to know the ‘cost base’ or original purchase price of the asset. From there, you can work out how much profit you’ve made by subtracting the selling price from the cost base.
Depending on how long you’ve held the shares for, you may or may not qualify for Australia’s 50% CGT discount on investments held longer than 12 months.
The Navexa platform provides an automated solution for making these calculations — more on that later.
That’s how the CGT rate is determined. So, let’s take a closer look at which investments the CGT applies to.
What Does CGT Apply To In Australia?
CGT applies to a wide range of investment income in Australia, including earnings generated from real estate, shares, cryptocurrency, foreign exchange, and collectibles.
When you dispose of an asset for more than what you paid for it, you realize a capital gain which you will have to pay CGT on.
There are a range of other situations that will trigger the requirement to pay CGT. These are known as ‘CGT Events’. A CGT event occurs when an investor makes a capital gain or incur a capital loss on an asset.
The Australian Tax Office (ATO) imposes CGT when you make a capital gain or loss
How Does CGT Apply To Shares?
When you sell shares for more than what you paid for them and realize a capital gain, you will have to pay CGT. When other CGT events occur, you will also have to pay CGT on your shares. Examples include switching shares in a managed fund between funds, or owning shares in a company that is subject to a takeover or merger.
It is important to keep good records of all your share transactions, including amounts and dates of purchase. When you file your tax return, CGT will need to be calculated for any profits you made from selling your shares.
Does CGT Apply To Dividend Pay-outs?
Many Australian investors enjoy investing in companies that pay out dividends (a percentage share of their profits) to their shareholders. But, like other forms of income, dividends are subject to taxation.
Dividends are paid from profits that have already been subjected to Australian company tax. Because the profits have already been taxed, shareholders won’t be taxed again when they receive the profits as dividends, provided that their marginal tax rate is lower than the tax rate paid by the company.
These dividends are described as being ‘franked’. A ‘franking credit’ is attached to the dividend and represents the tax that has already been paid by the company distributing the dividend. The shareholder who receives the dividend with an attached franking credit will either pay less than their usual tax rate, or receive a tax refund.
The general rule is that if your marginal tax rate is lower than the rate of tax paid by a company or fund, you might be entitled to claim a refund. However, if your marginal tax rate is higher than the tax already paid on the dividend, you may have to pay additional tax.
Does CGT Apply To Crypto?
If you were hoping to avoid paying CGT by investing in cryptocurrency, we have bad news for you. Cryptocurrency investment in Australia is also subject to taxation, in a similar way to other investment assets.
In recent years, the cryptocurrency market has grown rapidly, and the ATO has been quick to catch up.
Crypto gains are subject to CGT in Australia.
Cryptocurrency markets have exploded in recent years and the ATO is all over it
As with other assets, CGT may apply in circumstances other than just selling your crypto. The ATO classifies four main CGT events for crypto activity:
You’ll be taxed when you:
Sell crypto.
Exchange one crypto for another.
Convert crypto to a fiat currency like AUD.
Pay for goods or services in crypto.
Just like when you pay CGT at your marginal tax rate when you sell shares, you pay this rate when you sell crypto.
Generally, you could apply the same tax rules to your crypto portfolio as you would for investment in stocks.
You must pay CGT when you realize a capital gain from property. This could include selling an investment property for more than what you paid for it or selling a block of land that you created through a subdivision process.
Your main residence is generally excluded from CGT if you meet certain criteria specified by the ATO:
You will need to have lived in the home for the whole period that you have owned it.
The home can’t have been used to produce income or have been bought with the intention of renovating and selling it for a profit.
It must be on land no greater than two hectares.
If you meet the criteria, you may be able to avoid paying CGT when you sell your house. If not, you may still qualify for a partial exemption. The ATO provides a property exemption tool on their website to help you make the calculations.
In Australia, investors can expect to pay CGT on shares, crypto, property and more.
Capital Gains Tax (CGT) has to be paid on investment income from property
If you acquired property on or prior to 20 September 1985, CGT does not apply. But it will apply to certain capital improvements made after this date. It is also important to keep track of any rental income you receive from property and include it in your tax return. For more details on CGT and property, visit the ATO.
If You Are An Investor, It Pays To Know About CGT
As you can see, CGT applies to a wide range of investment income. When you prepare your tax return, you will need to provide the ATO with your assessable income and any capital gains or capital losses you made that year.
While this article isn’t financial advice, we do advise you to be well informed. The above is not an exhaustive list of what CGT applies to in Australia, so you should check with the ATO if you are unsure about what your tax obligations are.
You can’t escape having to file a tax return, but fortunately there are a few strategies you can use to reduce your tax burden, legally.
Let’s explore some of the strategies that investors use to minimize investment tax.
Effective Strategies To Minimize Tax Payments
There are several legal investment strategies investors employ to minimize tax bills and claim tax deduction. This goes for both gains and income.
Below you’ll find some of the ways Australian investors hold on to as much of their investment gains and income as possible.
The following is not investment advice. As with all the information on the Navexa blog, it’s general investment information our writers have collated from other sources. For any financial or investment decisions, you should always understand the risks, and seek professional advice if necessary.
Strategy 1: Hold Onto Your Investments For Longer Than 12 Months
Australian tax law makes a distinction between short and long term capital gains. A long term capital gain is when you make a profit on an investment that you’ve held for longer than 12 months. It’s a short term capital gain if you’ve held the asset for shorter than 12 months.
As an investor, this is important to understand because of something known as the ‘CGT discount’.
If you’ve held an asset for longer than 12 months before a given ‘CGT event’ occurs, you may be able to claim a CGT discount of 50%. Remember, a ‘CGT event’ is the point at which you make a capital gain or loss on an asset.
Let’s say you made $30,000 profit from investments that you’d held for less than 12 months, and your marginal tax rate was 37%. You’d have a $11,100 tax liability.
However, if you’d held the asset for longer than 12 months before you sold, the CGT discount would mean your tax liability was just $5,500! That’s a significant amount saved on your tax bill.
Capital Gains Tax discount applies to a wide range of investment income, including shares, property, and cryptocurrency.
As you can see, holding onto your investments for longer than 12 months to take advantage of this discount can be much more tax effective than disposing of them quickly.
Remember, you must be an Australian resident for tax purposes to take advantage of the CGT discount. There are also some other situations where the CGT discount does not apply.
For example, the discount is not available if the asset is your home and you started using it as a rental property or business less than 12 months before disposing of it.
A CGT discount of 50% is available to Australian trusts, and complying super funds can receive a discount of 33.33%. However, companies can not take advantage of the CGT discount.
When you file your tax return, you must subtract any capital losses that you may have from your capital gains before applying the CGT discount. In most cases you will be eligible for the discount if the asset has been held for longer than 12 months.
Navexa provides a platform where you can easily track your portfolio performance and calculate both your taxable capital gains and taxable income. Our CGT Reporting Tool gives a detailed breakdown of which assets are ‘non-discountable’ from a CGT perspective (those which have been held for less than the required 12 months to qualify), reducing the amount of tedious leg-work at tax time.
Navexa’s tax reporting tools remove the need to manually calculate your portfolio’s tax obligations and show you the most tax effective way to prepare a tax return.
Provided the portfolio data in your account is correct and up-to-date, you can run an automated tax report in just a few seconds.
Navexa’s CGT Reporting Tool.
What you see above is Navexa’s CGT Report.
Navexa calculates your taxable gains and displays a detailed breakdown. Capital gains are displayed according to Short or Long Term status alongside your Capital Losses Available to Offset. The report also calculates your CGT Concession Amount and finally, your total Capital Gain.
Navexa’s CGT Reporting Tool makes it easy to categorize your investments for your tax return.
Strategy 2: Offset Your Capital Gains With Capital Losses
Another useful strategy at tax time is using capital losses to offset your capital gains. While it would be nice if your assets always made gains and never losses, most of us who invest know that this isn’t the case. Thankfully, the silver lining here is that your capital losses can be used to reduce the tax you pay on your capital gains.
You will have made a capital loss when you sell an asset for less than what you paid for it. This loss can be deducted from capital gains that you made from other sources, to reduce the tax you pay. If you don’t have any capital gains to deduct from, the capital loss can generally be carried forward to future financial years. If you make capital gains in future years, the capital losses are still up your sleeve to deduct from any gains and reduce tax.
While there is no time limit on how long you can carry the losses forward if you don’t make any gains, the ATO does require that capital losses are used at the first available opportunity. This means when you have a capital gain to declare and capital losses available to offset, you must do so. They also require the earliest losses to be used first.
For example, if an investor owed $5,000 in CGT for their investments in a financial year, but had declared losses of $1,500 the previous financial year, they could carry these losses over to offset their capital gain, resulting in a reduced tax bill of $3,500.
There are some capital losses that can’t be deducted, so be aware of these. These include personal use assets such as boats or furniture, or collectables below a certain value. The ATO also won’t allow capital losses to be deducted from collectables unless they are deducted from capital gains from collectables.
Capital losses can also be deducted from your cryptocurrency assets, too. Let’s say you bought $5,000 worth of Ethereum because it had been surging in price and you were experiencing crypto-FOMO. You buy near the peak and in subsequent weeks the price crashes heavily, after a large nation announces that it won’t endorse cryptocurrency in their economy. Despite this disappointment, don’t forget that if you sell the asset and realize a capital loss, it could be a handy tool to offset other capital gains in your portfolio.
Despite a few exclusions, however, most capital losses from your investments can be deducted from capital gains you have made from other assets. If you are unsure about whether you can deduct a particular capital loss, check with the ATO.
Strategy 3: Invest In Companies That Pay High Dividends And Franking Credits
We’ve already looked at how the ATO taxes dividends, so what does this mean for minimizing your income tax obligations? Again, this is not financial advice.
Remember that companies must pay the Australian Companies Tax on their profits. If an investor receiving a dividend has a tax rate greater than the company tax rate that has already been applied to the company’s profits, they will receive a franking credit.
Let’s look at an example. Say an investor with a 32.5% tax rate receives a $1,750 dividend with a $750 franking credit attached. The franking credit takes the taxable income to $2,500, with gross tax of $812.50 payable. The franking credit rebate of $750 is deducted from the gross tax and the investor is left to pay a reduced tax amount of $62.50, leaving them with $1,687.50 after tax income. As you can see, the impact of the franking credit rebate is significant. For a full breakdown of this and other franked dividend scenarios, click here.
The investor in the above situation manages to retain most of their dividend income. Because the franking credit offsets their CGT so significantly, the amount of tax the individual pays is greatly minimized. Obviously, if your marginal tax rate is lower than 32.5% you will pay less tax and receive a larger chunk of the dividend. If you’re in a higher tax bracket than this, you will receive less.
Regardless of your marginal tax rate, franked dividends are a useful tool to reduce your tax obligations. Choosing to invest in companies that pay dividends, especially fully or highly franked dividends, is a popular strategy for minimizing tax paid on investment returns.
Navexa’s Taxable Income Reporting Tool
Navexa can help you accelerate the process of determining your taxable income. When you automate your portfolio tracking in Navexa, the Taxable Investment Income Report provides you with everything you need to know to prepare your tax return.
Navexa’s Taxable Investment Income Tool.
As you can see above, the Taxable Income Tool displays the Unfranked Amount and the Franked Amount for your dividends, as well as the total franking credits attached to them.
And in the below image, you can see the additional fields in the ‘Supplementary’ section. These display further tax-relevant information such as the amount of Franked Distributions From Trusts, the amount of Assessable Foreign Source Income, and your Foreign Income Tax Offset.
The report automatically categorizes sources and tax return codes.
A foreign income tax offset is when you may have already paid tax on something in another country. This might be employment income or capital gains. In some instances, you may be able to claim a foreign tax offset as part of your tax return. Navexa’s Taxable Investment Income Tool will calculate and display these details for you.
Below these fields, you’ll be provided with a holding by holding breakdown of your taxable investment income, like this:
Navexa’s holding by holding investment income breakdown.
This shows you subtotals for payments from each holding, with grand totals for each column at the bottom. Assets are organized by the dates at which you acquired them, which has important tax implications.
At the top right of the report, you’ll find buttons for exporting the report as both an XLS and a PDF file.
This helps you accelerate the process of preparing your investment income for assessment.
Let’s take a look now at how different investors might choose to dispose of their assets.
Different Tax Strategies For Disposing Of Investments
When the time comes that you want to sell, it can be easy to get excited about the potential gains you are about to realize. This excitement can be dampened, however, when you are faced with the reality of your tax bill.
Choosing a particular method to dispose of your assets can have a major impact on the profits you generate and the tax you pay on them.
Please remember that this does not constitute financial advice. Our writers have collated a wide range of information relating to investment tax that we think is useful for you to consider. As always, we recommend you do your own research before making any investment decisions — tax or otherwise
Strategy 1: First-In-First-Out (FIFO)
The first-in-first-out (FIFO) approach is a common method used by investors when they sell holdings. When you purchase a group of shares at a given price, they will constitute a ‘parcel’.
You may acquire shares in the same company in several different transactions over a period of time. Each transaction forms its own parcel of shares.
The concept of FIFO relates to the disposal of investments. When you are ready to sell shares, you can choose which parcels — sometimes called ‘lots’ — of shares you would like to sell.
Using the FIFO method, you would sell the parcels that have been held for the longest period. Provided that the share price has risen since the time of purchase, the FIFO method will ensure the greatest capital gain from the sale of a parcel of shares. Obviously, this won’t always be the case, and adopting a FIFO approach might not result in the greatest capital gain.
For example, if an investor purchased 100 shares in a company at $20 per share three years ago, and another 100 shares at $40 two years ago, they might choose to use the FIFO method when they choose to sell some of those shares.
Let’s say the company’s share price has now risen to $50. The investor sells using the FIFO method, disposing of the first 100 shares that were purchased at $20. Because the share price has grown $30 since they purchased them, they realize a gross profit of $3,000. However, if they had chosen to sell the more newly acquired shares parcel, they would only realize a gross profit of $1,000.
As mentioned, FIFO will only result in the largest capital gain if the share price has risen consistently over time. If share prices have dropped since you bought them, the FIFO approach might not result in the greatest capital gain — but it could lower your tax burden.
Strategy 2: Last-In-First-Out
In the above example, the investor opted to sell their more recently acquired shares because they wanted to maximise their capital gains. Because the share price rose over time, the FIFO approach achieved this goal.
LIFO works in the opposite manner to FIFO — your newest shares are sold first. The LIFO method ‘typically results in the lowest tax burden when stock prices have increased, because your newer shares had a higher cost and therefore, your taxable gains are less’.
If we continue to assume a consistent growth in share price, LIFO would be a useful strategy to dispose of assets and realize less capital gain from the disposal — and subsequently pay less tax.
However, don’t forget that you can only qualify for the CGT discount if you’ve held shares for longer than 12 months.
Investors have four main ways to calculate their portfolio’s capital gains.
FIFO and LIFO are based on shares being organized by time
The FIFO and LIFO approaches above assume that share prices have risen over time. When the opposite is the case, a smaller capital gain may be realized by selling the newly acquired shares or vice versa. The degree to which FIFO or LIFO suits your goals will depend on how the share price has behaved since you acquired the asset.
Some investors might opt for a more precise method of disposal such as maximum or minimum gain, to ensure that they dispose of the parcels which will return the greatest capital gain or result in the lowest tax burden.
Strategy 3: Maximum Gain
The FIFO and LIFO methods are based on selling assets based on the time at which you acquired them. One alternative approach is maximum gain, which is focused on the price at which shares were bought, rather than the time they were bought.
The suitability of FIFO or LIFO will depend on what has happened with the share price since you bought, and what your goal is. Maximum gain focuses on disposing of the assets that were acquired for the lowest price, rather than those which were acquired first or last. This approach is suitable for those looking to ensure maximum capital gains when they sell.
An example of the maximum gain approach: A prospective home buyer has found their dream home and needs to prove to their bank that they can service a large mortgage. They carefully select the shares that were bought at the lowest price in their portfolio to sell, so they can realize the maximum possible capital gain from the sale. While they will pay the most tax using this method, the capital gain will be the largest, and this will help paint a healthy financial picture to the bank.
But, you may want to minimize your CGT obligations.
Strategy 4: Minimum Gain
The minimum gain approach works in the opposite way to maximum gain — you select the parcels of shares in your portfolio that you acquired for the most expensive price and sell these first. By choosing to sell the tax lots with the highest cost base, you will minimize your gain.
This strategy is generally used by investors who want to minimize their CGT obligations. As we know, less capital gain = less tax paid.
Minimum and Maximum gain, as well as FIFO and LIFO approaches, will suit different investors depending on their requirements.
Regardless of what your aspirations are, and which approach you choose, it is important to make sure that your investment portfolio is kept in good order.
Record keeping is paramount in both portfolio management and personal finance — particularly as it concerns reporting your investment activity to the tax authorities.
The above strategies are probably best deployed when you have a clear understanding of your portfolio’s performance. It is important to keep an accurate record of your transaction history, including the dates and prices at which you bought particular shares. This knowledge is vital if you wish to select the most tax-efficient disposal strategy that you can. Or in some instances, simply if you want to maximise your capital gains.
The Navexa Portfolio Tracker automates this entire process, from tracking trades and transactions to optimizing how you report CGT on a portfolio.
Remember, Navexa doesn’t offer tax advice. We always encourage you to consult your accountant or seek other professional advice when it comes to investments and taxes.
The Navexa portfolio tracker’s portfolio overview.
Automate Your Portfolio Tax Reporting & Optimization With Navexa
Navexa is a platform for tracking your investment portfolio and displaying detailed information that will help you better understand your performance — and better handle investment tax reporting.
When it is time to prepare your tax return, you should have a clear vision of what you want to achieve. Whether you are looking to maximise your capital gains or minimize the impact of CGT, Navexa makes the process fast and stress-free.
Our CGT and the Taxable Income tools can help you determine your obligations and options when it is time to file your tax return.
Join thousands of Australian investors already using Navexa to manage their investment portfolios.
With Navexa you can:
Track your stocks and crypto investments together in one account.
Automatically track capital gains, portfolio income, currency gains and losses and trading fees.
Benchmark your long-term portfolio performance against any index you choose.
Automatically track your dividend and distribution income from stocks, ETFs, LICs and Mutual/Managed Funds
Use the Dividend Reinvestment Plan (DRPs/DRIPs) feature to track the impact of DRP transactions on your performance (and tax)
See the complete picture of your investment performance, including the impact of brokerage fees, dividends, and capital gains with Navexa’s annualized performance calculation methodology
Run powerful tax reports to calculate your dividend income with the Taxable Income Report
Calculate your CGT obligations with our Australian Capital Gains Tax Report and the Unrealised Capital Gains Tax Report
Using the Rule of 72 is a simple method for getting an approximate idea of how long it takes for your money to double. So how can you use it in tracking your investments?
In a perfect world, investors would like to know, in advance, how long it will take to double their money in the stock market. Knowing exactly how long this will take is helpful in planning out portfolio diversification, and eventually achieving financial freedom.
But, how does one go about working out how long it might take to double the value of a portfolio?. Investors can easily become confused. Especially when it comes to accounts that receive annual interest. Then, they may reach for complex formulae, and spreadsheets.
But, there’s a simpler, better way of calculating the period it will take to double one’s investment.
One of the best ways is to use the Rule of 72 — one of the simplest methods of calculating when one’s portfolio will double in value.
What is the Rule of 72?
The Rule of 72 refers to the mathematical concept that shows how long it will take an investment to double in value (in theory). It’s a simple formula that anyone can use to determine the approximate time when an investment will double at a given annualized rate of return.
However, the Rule of 72 only works for calculating compounding growth. Investors can use the Rule of 72 only for an account that earns compound interest, not simple interest. Additionally, the Rule of 72 works better with an interest rate ranging from 6% to 10%.
Besides being used to show exponential growth of a portfolio, the Rule of 72 is also used to show exponential decay. For example, the loss of purchasing power caused by inflation, or the drop in the population numbers.
Compound Growth vs. Simple Growth
Interest helps the portfolio growth, and allocating a certain amount of money to an account that earns interest is a smart move investors make. There are two types of growth, or interest — simple and compound, and these are crucial for using the Rule of 72.
Compound interest is added to the already existing interest, plus the principal amount of the loan or deposit.
This type of interest is calculated with the following formula:
A = P (1 + r) (n)
On the other hand, simple interest is added only to the original investment. The formula for simple interest is:
A = P (1 + Rt)
Compound interest is better, as it can reduce the time required to double the money in an account, and grows the investments exponentially.
In other words, compounding interest grows an investment more and more every year, since the interest gets calculated on progressively larger amounts. Whereas simple interest doesn’t compound on itself over time.
Origins of the Rule of 72
While it may sound surprising, the Rule of 72, and the concept of interest aren’t new ideas. Even ancient civilizations, such as the Mesopotamian, Greek, and Roman, used them in transactions, and basic money management.
While it may not have been called the Rule of 72, it was always around. For example, lenders always wanted to know how to manage their investments, and the rate of return.
Who Came up With the Rule of 72?
The first person to ever take note of the Rule of 72 was Luca Pacioli. Pacioli was an Italian mathematician. He mentioned the Rule of 72 in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Summary of Arithmetic, Geometry, Proportions, and Proportionality), published in 1494.
Pacioli stated that people who wish to know how many years it will take to double their investment should always ‘keep the number 72 in mind.’
Pacioli never went deeper into defining or explaining the reasoning behind 72.
With that in mind, it could have happened that someone else invented the number to improve their calculation of the interest rate, and portfolio growth. Some even say that Albert Einstein was the one to invent the Rule of 72, but that was never confirmed.
Why Is It Called the Rule of 72?
There’s no specific reason this rule is called the Rule of 72. Still, it serves to replace the complex logarithmic calculation that most investors are having trouble dealing with. The exact formula for determining how many years it takes to double your money based on compounding interest, or growth, is:
ln(2) / ln(1 + (interest rate/100))
where “In” represents the natural log value.
Good mathematicians could use this formula to get accurate results by observing return rates, and natural logs. The actual number that’s derived from the formula is 69.3. However, since this number is not easy to work with, people usually replace it with 72, since it’s equally good in showing the approximate number of years necessary to double the investment.
Navexa’s portfolio tracker is even easier to use. Our portfolio tracker automatically calculates every aspect of portfolio performance for shares, cryptocurrency, cash accounts and more.
How to Use the Formula?
To calculate how long it would take for the investment to double in value, one can use the following formula:
Years to double = 72 / expected rate of return
This method can also be used to calculate the expected rate of return.
Investors should divide 72 with the years to double to get the rate of return on their investment (expected rate of return = 72 / years to double).
This principle handles fractions, or portions of the year. Plus, the resulting rate of return includes compounding interest on the investment.
However, there are a few things to pay attention to:
the interest rate should not be a decimal
this formula should be applied to an investment that receives annual interest (compounding)
the farther the interest rates are from 8%, the less accurate the results would be
to calculate lower interest rates, one can drop the number to 71
this formula is easily divisible, but not perfectly accurate
Rule of 72 — Variations
Since this principle provides an approximate result, sometimes investors use slight variations, like the Rule of 69, Rule of 70, or Rule of 73.
These numbers are used in the same way, and serve to calculate the years required for the investment to double in value.
Rule of 72 — Examples
Here’s a simple example of using the method to calculate how long it takes for the investment to double:
Let’s say an account earns 4% of annual interest.
dividing 72 by 4 would give the years it takes for the money to double – 18.
When used to show inflation, and other deprecating numbers, the formula is the same.
However, the final result will show the years it will take for the amount to be cut in half.
Since this principle provides an approximate result, sometimes investors use slight variations, like the Rule of 69, Rule of 70, or Rule of 73.
Both novice, and experienced investors could use the Rule of 72 to estimate the doubling time of their holdings. Since the Rule of 72 is easy to use, almost anyone can estimate how long it will take for a certain number to double in value.
Who Uses The Rule of 72?
Since this rule can be used outside of personal finance and investing, it’s also used by other experts who need to estimate how many years it will take for a value to double.
What Is the Rule of 72 Good For?
The Rule of 72 is a good method that can be applied to anything that grows (or decays) exponentially. For example:
GDP
Inflation
Investment compounding interest rate
Credit card debt
House mortgage
Car loan refinancing
How Does the Rule of 72 Work?
By using the Rule of 72, investors can get an approximation of the years it will take for their assets to double in value.
This makes the Rule of 72 one of the key personal finance formulae to understand for investingt. Plus, this rule gives a general idea of how many “doubles” an investor might get during their lifetime, or for a certain period.
Does It Show Accurate Results?
When it comes to the accuracy of this rule, the Rule of 72 provides approximate information about the desired time period.
This formula is a simplification of the more complex logarithmic equation. Investors who wish to get an accurate result would have to do the entire calculation, or use an electronic spreadsheet calculator.
As we previously mentioned, this rule is usually used to determine the rate of return on the investment. However, experts in various industries can also apply this principle to anything that is compounding, and this doesn’t necessarily involve money.
For example, a city’s population that grows/decreases by a certain percentage per year can also use the rule to check how long it would take for the population to double, or halve.
Limitations of This Principle
Besides not being completely accurate in showing data, this formula is also mainly applied to compounding interest accounts, not simple interest ones. What’s more, the Rule of 72 works better for lower interest rates, and is less precise as the interest rate increases.
Additionally, this calculation can’t be used to forecast how long it might take to get a double return with decentralized finance and cryptocurrency, due to high market volatility, and sudden changes in prices.
In fact, no calculation can give anyone a 100% accurate prediction of what their investments may or may not do in the future.
Speculating Future Returns With The Rule Of 72
When people invest, they often want to know how long it will take to double their money. However, predicting the exact number of years can be tricky.
This is why the Rule of 72 exists. When used correctly, with an investment that involves compound interest,this formula is generally fairly accurate — provided, of course, the annualized rate of return remains consistent.
here are certain limitations investors should be aware of. This mathematical concept works only with accounts that receive compounding annual interest at lower rates.
The higher the rates go, the less accurate the results will be.
This principle doesn’t work with simple interest.
On the other hand, investors can slightly change the number, based on their annual interest rate. For example, some may use 69.3, or 73, depending on the percentage of their rate.
The Navexa portfolio tracker and reporting platform is a fast, accurate way to determine your annualized rate of return across shares, ETFs, cryptos, cash accounts and more. We handle all portfolio performance calculations behind the scenes so you can focus on better understanding your portfolio and returns.
Managing a complex portfolio and calculating cash dividends might be challenging. Here’s how it can be done with ease with a few formulas — and with the Navexa portfolio tracker.
Most people who consider investing are familiar with owning stocks. Some are also highly interested in receiving a dividend payout. Those who go deeper into researching an investment, might decide on purchasing stocks of companies because that pay cash dividends.
Dividends might help investors maintain a stable portfolio, remain invested in quality companies, and earn a profit, all while holding shares.
However, novice investors may find dividends confusing — especially when it comes to calculating their dividend yield per share.
The traditional way to calculate dividend per share is using the company’s income statement and similar reports. But, there are other, easier methods, too.
Dividends Explained
Cash dividends are payments companies make to shareholders from their profits.
A dividend is defined as a distribution of a company’s earnings or stocks to a class of its shareholders. Dividend payouts are determined by the board of directors, and shareholders receive them for as long as they hold the stock.
A dividend is a form of reward to shareholders for investing in the organization and for holding the stock. Dividends may also help a stock’s price remain relatively stable.
Some companies offer dividend payments and prefer to keep the shareholders satisfied. Others decide not to pay dividends, instead reinvesting profits back into the company.
Dividends are paid monthly, quarterly, or annually, depending on the company. They’re paid at a scheduled frequency, so investors always know when they’ll receive the profit from holding shares.
Receiving a dividend based is a great way to increase one’s income, but there’s more to it.
Shareholders also pay attention to other factors, such as dividend yield, rates, retention ratio, and other key numbers.
Dividend Rate vs Dividend Yield
The dividend rate is a percentage that shows how much the company pays in dividends annually, relative to its stock price. The dividend rate can be fixed or adjustable, and it’s expressed as a dollar figure.
The dividend rate is calculated with the following formula:
Dividend rate = dividend per share / current price
On the other hand, the dividend yield is expressed as a percentage, and shows the ratio of a company’s annual dividend payout, compared to its share price.
Shareholders can calculate the dividend yield by using the following formula:
Dividend yield = annual dividends per share / current share price x 100
Navexa helps share investors by calculating dividend performance automatically. Navexa’s app is easy to use, and tracks multiple types of investments. This includes tracking and reporting on cryptocurrency investments.
Dividend Payout Ratio vs. Retention Ratio
The dividend payout ratio shows how much of the company’s earnings after tax are paid to the shareholders. It’s in direct relation to the organization’s net income amount, and it’s used to measure the net income percentage.
It’s calculated by the following formula:
Dividend payout ratio = total dividends / net income
On the other hand, the dividend retention ratio represents the percentage of net income that the company keeps to grow the business, instead of paying it out to the shareholders as dividends.
It’s calculated by the following formula:
Retention ratio = retained earnings / net income attributed to stockowners
Calculating Dividends per Share and Earnings per Share
Dividends per share (DPS) is the number of stated dividends paid by companies for each of the shares outstanding. It represents the number of dividends each shareholder receives based on the shares they own.
DPS is often used to calculate dividend yield, and the formula goes as follows:
DPS = total dividends paid over a period – special dividend payout / shares outstanding
On the other hand, earnings per share (EPS) are useful in calculating how profitable the company is based on measuring the net income for each of the company’s outstanding shares.
EPS is also an important number used to determine share price.
EPS shows whether investing in a certain company and holding its shares would benefit the shareholders and improve their net income.
For example, if the company reports an EPS that’s below a certain estimate, that might cause its share prices to drop.
The formula for calculating earnings per share goes as follows:
EPS = net income – preferred stock dividends / outstanding shares
Types of Dividends
Four types of dividends include cash, stock, property, and liquidating dividend.
There are several types of dividends that a company may pay to the shareholders. These include:
Cash dividend
Stock dividend
Property dividend
Liquidating dividend
Cash dividends are the most common. They represent a simple distribution of funds to incentivize shareholders to hold their shares, improve the shareholders’ equity, and increase confidence in the organization.
What Are Cash Dividends?
Cash dividends represent money a company pays to the shareholders per share they own. The money can come from the organizations’ current earnings or accumulated profit. Cash dividends are paid regularly, usually by quarterly or annual payments.
Once the shareholders receive this dividend, they may have the option to accept the cash payment, or reinvest in additional shares (known as a dividend reinvestment plan) and improve their position in the market.
The willingness of the company to pay cash dividends shows a solid financial strength, and positive performance, although that’s not always the case. Sometimes the companies may keep paying dividends, but still be in a poor financial position and eventually shut down.
This is why potential stock owners must be careful when investing and take everything into consideration before they invest in the organization.
Which Company Can Afford to Pay a Cash Dividend Yield?
Many companies have outstanding earnings, and can afford this form of dividend payout. These are just some of the companies that offer dividend payouts across the ASX, NASDAQ and NYSE:
IBM
AT&T
Johson & Johnson
QUALCOMM
Fortescue Metals Group
BHP
Magellan Financial Group
More experienced investors can easily determine which company has a solid income statement, and capital, which helps them invest in profitable shares. On the other hand, novice investors may struggle in finding the dividend shares worth investing in.
Potential stock owners must be careful when investing and take everything into consideration before they invest in the organization.
Still, investing in shares that pay these types of dividends can help both new and experienced investors increase capital.
Additionally, those who wish to invest often check out the company’s trailing 12 months (TTM).
This is a set of performance data that shows how the organization managed finances in the last year. TTM is beneficial for understanding a company’s growth and potential.
Example of a Cash Dividend Payout
Here’s a simple example of a cash dividend:
One investor owns 100 shares of company X. At the end of a quarter, the company X calculates its financial performance for that quarter.
The board of directors then reviews the information, and decides on a $0.50 dividend per share for the quarter.
This means that the investor is entitled to $0.50 x 100 shares = $50
How Does a Cash Dividend Work?
When a company earns enough, it may decide to distribute part of its earnings to the shareholders. This part of the earnings is most commonly distributed via cash dividends paid in regular intervals, usually quarterly.
While these dividends are a great way of motivating shareholders to stay with the company, they may cause the stock price to drop. Still, investors love companies that offer dividends, as they know they can count on regular payouts.
Why Does a Cash Dividend Matter?
There are many reasons these dividends are important to shareholders. For example, the cash dividends could signal whether the company has good financial health.
It may show that a company is more effective in using its capital, compared to companies that don’t pay dividends.
Dividend payment per stock also increases the chance of shareholders remaining invested in the stock. This means the company’s stock price may stay more stable.
Are Cash Dividends Better Than Stock Dividends?
When it comes to the cash dividend, shareholders have no other option but to either keep it, or reinvest it and increase the number of shares they own.
Even though these dividends are a more common way of paying shareholders, stock ones are sometimes considered better.
When it comes to the cash dividend, shareholders have no other option but to either keep it, or reinvest it and increase the number of shares they own.
With a stock dividend, they can keep the shares or turn them into cash. Plus, stock dividends aren’t treated as taxable, as they’re usually not turned into income.
The Advantages of Cash Dividends
There are many advantages of the dividend payout for shareholders. One of the main advantages is the steady income. These dividend payouts are regular, so shareholders know when they’ll receive the funds.
Regular payouts are especially beneficial for those who build a large portfolio with a view to living on the income.
Receiving dividend payments can also be a good way of establishing a market hedge. This defends the shareholders from the stock price dropping, which often happens during a bear market.
Furthermore, they know that companies that pay dividend yield may be more careful with their financial decisions, as they want to keep people invested in their shares.
The Disadvantages of Cash Dividends
While these types of dividends are common, and can yield great profit for investors, there are certain financial disadvantages for companies.
One of the major disadvantages to paying the dividend is that the money that’s paid to shareowners can’t be used to further develop the business. In a way, paying the dividend prevents the company from investing in increasing sales and profits. Instead, offering a healthy dividend might sustain or even raise the share price — effectively raising capital for the business.
When it comes to shareholders, dividend payments mean they’ll have taxable income. However, if an investor has an income that’s too low to make them liable for tax, they may be entitled to a refund from the Australian Taxation Office.
Do Cash Dividends Go on the Balance Sheet?
A balance sheet is a financial statement that involves the company’s stock, other assets, liabilities, and shareholder equity. This sheet is also used to evaluate the business.
Dividends do impact the balance sheet, as they will show a decrease in the company’s dividends payable, and financial balance. The balance will be reduced.
To check the total amount of paid dividends, investors should also use a financial statement. This statement shows how much money is entering and leaving the company.
Why Do Shareholders Prefer Cash Dividends?
According to financial theory, investors don’t care much about whether they’ll receive cash or stock dividends, for as long as they have the same value. However, this approach doesn’t include other complexities, such as taxes, transaction costs, dividend payout, demographic attributes of investors, etc.
On the other hand, the theory states that investors would pay additional expenses for receiving cash dividends, and they may prefer them over stock dividends.
Some shareholders would rather pay the taxes and receive cash for their outstanding shares, than receive additional stocks, simply because of direct financial compensation.
Accounting for the Cash Dividend
These forms of dividends are usually accounted for as a reduction of a company’s retained earnings. After the board of directors allows this type of dividend payout, the company debits the retained earnings account, and creates a liability account called ‘dividends payable’.
By moving funds to a dividends payable account, the company reduces equity, which is instantly shown in the company’s balance sheet even though no money has been paid out yet. This, in turn, increases liability.
Once the payment date comes, the company then reverses the dividend payable with a debit entry, and credits the cash account for the cash outflow.
In that way, these forms of dividends don’t actually affect the company’s income statement. Still, all companies that pay these dividends must report the payments in the cash flow statement.
Calculating Cash Dividend
Calculating the dividend payout for the given year is done by subtracting the retained earnings from the beginning of the year from the end-of-the-year numbers.
Based on the complexity of these types of dividends, potential stockholders may struggle in finding the appropriate information they can use to calculate the dividend payout. In general, companies report their dividends in a statement they send together with their accounting summary to their stock owners.
Some organizations share the date in press releases. However, that’s not always the case.
Those who can’t find this data officially, usually consult the company’s balance sheet, which can be found in the annual reports.
Calculating Cash Dividend From a Balance Sheet and Income Statement
If the dividend payout is not explicitly stated in any public document, potential shareholders can look into two things:
Balance sheet
Income statement
The balance sheet is a record of the organization’s assets and liabilities. This document reveals how much the organization has kept in terms of retained earnings. Retained earnings are all earnings of the company that weren’t paid out as dividends.
The second document, which can be found in the annual report, measures the organization’s financial performance for a certain time period. The income statement shows how much net income a company had during a certain year.
This document helps determine what changes would occur in retained earnings if the organization had decided not to offer a dividend payout for that time period.
Calculating the dividend payout for the given year is done by subtracting the retained earnings from the beginning of the year from the end-of-the-year numbers.
This will give the net change in retained earnings, which should then be subtracted from the net income for the year.
The final number shows the total amount of dividends paid during the stated period.
Cash Dividend Per Share Formula
Those who wish to do their own accounting can easily calculate the earnings they receive from per-share dividend yield. After purchasing a stock that pays dividends per share, the shareholder would usually get quarterly dividend checks.
To find the dividend payment per share, the quarterly dividend payout should be divided by the number of shares.
To get annual numbers, the shareholder can multiply the quarterly dividend yield by four.
However, with Navexa, there’s no need to use complicated formulas to calculate the growth of a portfolio.
Navexa is a smart portfolio tracker that manages accounting for its users. Our app makes investing simple, as it automatically calculates portfolio changes.
Navexa tracks and records every dividend payment — cash and reinvested — in a portfolio and provides insights into which holdings are earning the most and least in a given period.
Plus, Navexa can annualize portfolio performance, and automate portfolio income tax reporting.
The Navexa Portfolio Tracker allows you to track dividends alongside capital gains, trading fees & more.
Final Word On Calculating Cash Dividends
Owning dividend-paying stocks is an attractive proposition and a key part of many investors’ long-term wealth building strategies.
But while earning income from an investing is good, it’s vital that investors keep track of their dividend performance — whether that’s from cash dividends or reinvested dividends.
This is important not just to understand and analyze how much a portfolio is generating in income (and how much that income contributes to overall performance), but because investment income is taxable.
Tax reporting requirements require that investors provide full details of their investment income.
That’s why we’ve built the Navexa portfolio tracker’s automated taxable income calculator. The tool calculates every last cent worth of income an investor needs to report for a given tax year, including details on franking credits (for Australian investors).
It’s part of our mission to empower investors to build brighter financial futures with simple, but powerful, automated investment analytics and reporting tools.
Tracking a cryptocurrency portfolio might be challenging. Here’s what experienced inventors use to understand their crypto ROI.
Investing in cryptocurrencies can be challenging, especially for investors who are used to dealing with traditional assets. These investors often see the crypto market as highly volatile.
In addition, there’s a lot of market manipulation, which often causes drastic price movements.
However, most people get attracted to crypto investment and jump into a digital asset because of the possibility of a high return on investment.
Even the experienced trader who deals with gold might test out the waters and get into crypto, ready to take the risks.
Here’s how they calculate the ROI, rate of return, and their net profit.
Briefly on Cryptocurrencies
There’s a lot that can be said about cryptocurrencies, but new investors should know that it all started with Bitcoin (BTC) in 2009. It was the first-ever digital currency that introduced a peer-to-peer electronic cash system.
Once the first cryptocurrency started getting traction, others followed. Soon, a whole new market was born, and ever since, the financial industry hasn’t been the same. Cryptocurrency opened up many doors to investors who can now invest in these assets in several ways, such as:
Purchasing coins or tokens directly on the exchange
Investing in an Initial Coin Offering (ICO)
Investing via Initial Exchange Offering (IEO)
Getting into Crypto Exchange Traded Fund (ETF)
Some of the new options for investing in crypto include purchasing non-fungible tokens (NFTs) and lending money via some of the Decentralized Finance (DeFi) platforms.
How to calculate rate of return and net profit for crypto investments
Dangers of Investing in Cryptocurrency
Even though there are many ways to get introduced to crypto investments, novice investors often worry about the limitations regarding current and future regulations.
Many investors don’t consider the value, efficiency, or use case of the cryptocurrency they invest in. Some also completely ignore the technology behind the project and only follow a hyped community and current market sentiment.
This often results in a poor, emotion-driven investment decision, which brings a negative return on investment (ROI).
On the other hand, some investors are fortunate, and hit the nail on the head by getting into tokens which prove to be successful projects, bringing high ROI.
Still, those who purchased crypto and learned to manage the risks claim there’s a potential for a decent return on investment (ROI).
However, ROI depends on the current price of the asset and market fluctuations, which can be shaken with just one negative headline.
This is why calculating the rate of return and ROI can be tricky.
What Is Return on Investment (ROI)?
Return on investment, or ROI, is defined as the percentage growth or loss of investment, divided by the initial cost of an investment, multiplied by 100. ROI calculation measures the profitability of an investment.
On the other hand, the rate of return, or IRR, is the rate of all future expected cash flows of an investment. IRR measures the estimated return.
Both are used to measure the performance of investments, with ROI being used by individual investors or institutions and IRR being used by financial analysts.
Positive ROI and Negative ROI
The difference between a positive ROI and a negative ROI is simple. A positive return on investment means that net returns are greater than any investment costs.
The negative ROI percentage shows the net returns are poor, meaning the total costs are greater than returns.
The Importance of the ROI Metric
ROI is the key performance indicator that shows how successful an investment might be. ROI calculation can be handled in two different ways:
By using the standard ROI formula: subtracting the initial value of the investment from the final value of investment, and then dividing the number by the cost of investment x 100
By using the alternative ROI formula: dividing net return on investment with the cost of investment x 100
Still, investors should be mindful that the annualized return formula often ignores the compounding that’s added to the initial value, which is why it might give incorrect results.
Tools Investors Use to Calculate ROI
There are many tools to calculate ROI, and experienced investors often don’t even have to use a formula to get the numbers right.
For example, Navexa is one of the best ROI and portfolio trackers people can use to keep track of the money they invested.
It’s a smart portfolio tracker tool, developed to pull data from all sorts of platforms, including crypto exchanges.
Navexa helps traders and investors see their annualized ROI with ease — bypassing the need to use any manual calculation.
What is Crypto ROI?
Crypto ROI helps investors calculate the performance and efficiency of their crypto investment.
By calculating crypto ROI, traders and investors also compare how different crypto investments perform against one another, and which asset has the highest potential of bringing more money.
What’s more, crypto ROI is a key metric in determining the performance of an asset compared to its initial price.
Calculating crypto ROI has become a popular indicator for Bitcoin, Ethereum, and altcoin traders and investors.
Crypto ROI is observed in the same manner as traditional investments ROI — if an ROI is positive, that means the investment is performing well — the price is increasing over a certain period.
On the other hand, if the value of ROI is negative, that means the asset has lost value.
When it comes to crypto, it might be tricky to know whether a crypto investment will bring ROI.
Digital assets often look quite appealing, especially to new investors, but the market is very volatile and high ROI often depends on multiple factors.
Why do Investors Measure Investment ROI in Crypto?
The most common reason investors measure crypto return on investment ROI is to see whether the initial value of the investment has increased.
Calculating crypto ROI gives the general idea of how profitable an investment is.
It also shows how the investor’s portfolio performance compares to the initial investment.
Navexa tracks and reports on crypto returns & performance
How to Calculate ROI in Cryptocurrencies?
Investors usually calculate crypto ROI by subtracting the original cost of investment from the current value and then dividing it by the original cost.
Just like with traditional investment assets and markets, ROI calculation shows whether an investment strategy is working or not.
Is ROI an Ideal Metric?
While ROI is a powerful metric that shows the success or failure of the investment strategy, it has some flaws. For example, ROI doesn’t usually account for the time someone spent investing. This is why analysts often calculate annualized ROI, which shows the progress of profit or loss for a given timeframe.
ROI doesn’t explain the asset’s environment, market risk, and liquidity changes. This is why investors often rely on a few other metrics, and not just the ROI.
Those crypto investors who prefer trading to holding should also account for other factors and costs, such as trading fees, wallet fees for sending the coins, and any other metric related to their expenses.
They should also account for the dates when they bought and sold an asset.
The ROI metric doesn’t reflect the risk associated with purchasing, trading, and holding crypto, which is why investors must rely on additional data.
Crypto ROI Calculator
There are many crypto investment ROI calculators out there and most are super easy to use to calculate profit on crypto investments.
Navexa is one of the top crypto ROI calculator tools investors use to get the percentage of their ROI.
The Navexa portfolio tracker calculates performance for stock and cryptocurrency holdings, including capital gains, currency gain tracking, income tracking and more. Navexa is easy to use and free to start with, so both novice and experienced investors can test out its features.
Example: Calculating the ROI of a Bitcoin Investment
Bitcoin is likely the first asset investors get into when they start investing in crypto. Here’s a simple example of how people calculate the ROI of BTC.
Let’s say someone invested $2,000 into BTC. After a while, their $2,000 grew to $6,500.
They would calculate the BTC ROI following the standard formula:
($6,500 – $2,000) / $2,000 = 2.25 x 100 = 225% ROI
Return on Investment for Different Digital Assets
With so many different assets on the crypto market, each asset may have a different ROI. Those projects that have a more active community, and a better use case for their tokens may provide higher ROI to early investors. However, that’s not always the case and this post should not be considered financial advice!
Bitcoin is already a somewhat established asset, and its ROI has historically been the highest compared to other assets. On the other hand, Ethereum is the second-largest cryptocurrency after Bitcoin, but it just recently provided a higher ROI for some investors.
Some of the best performing assets currently include The Sandbox, Terra, Decentraland, and other assets that are related to the metaverse, play-to-earn gaming models, NFTs, and a few other new technologies in the crypto space.
However, experienced investors know that the crypto market is unstable and that ROI on most crypto assets can become negative if the coins face a massive sellout.
Final Word on Calculating Crypto ROI
One of the reasons people get into crypto is the promise of a potentially high ROI. However, getting great returns with crypto can be challenging. Still, measuring ROI can help investors make more rational decisions. ROI metric also helps people allocate the money in their portfolio in the right way so that they’re more profitable in the long run.
On the other hand, calculating ROI on a crypto investment could be tricky, as investors often forget to account for their trading fees and other expenses they managed.
However, with Navexa, getting a clear ROI metric is easy 🙂
An introduction to some of the (legal) ways to optimize investment taxes in Australia.
Paying tax is part of investing. While you can’t avoid paying tax (at least, not legally), there are several ways in which you can reduce the impact of tax on your investment earnings.
This post explains the tax system in Australia as it relates to investment income, and introduces some strategies Australians use to minimize their investment taxes.
Different investment strategies have different tax obligations
Tax And Investing In Australia
The Australian Tax Office (ATO) requires individuals to declare investment activity in their tax return and pay tax on all investment earnings, including capital gains and dividend income.
If you buy shares, invest in property, or hold other investments and then sell them at a higher price, you will have made a capital gain.
The Capital Gains Tax (CGT) is the tax rate that is applied to net capital gains (total gains minus total losses).
How Does the Capital Gains Tax (CGT) Work?
The capital gains tax is not a set rate but is calculated according to an individual’s marginal tax rate. This is the tax rate for personal income, and will be the tax rate applied to investment earnings.
Capital gains are taxed at an individual’s marginal tax rate
Unlike CGT rates for individuals, flat CGT rates apply for companies and self-managed funds. Trading companies pay 26% if their annual turnover is less than $50 million. If it exceeds $50 million, the CGT applied is 30%. Investment companies don’t qualify for the 26% rate and are taxed at 30%. Self-managed super funds are taxed at a lower rate of 15%.
Getting back to individual taxation, if you sold any investments during a financial year, including shares, you will need to work out your capital gain or loss for each asset. CGT will need to be paid on your net capital gains. The Navexa platform provides a straightforward solution for making these calculations — more on that later.
Which Investments Does The CGT Apply To?
CGT applies to a wide range of investments, including property, shares, and cryptocurrency. When you sell an asset and realize a gain from that sale, you will be charged CGT.
In addition to owing CGT when you sell an asset, the tax also applies in other investment situations, or ‘CGT events’. A CGT event occurs when you make a capital gain or incur a capital loss.
Examples of other CGT events include switching shares in a managed fund between funds or owning shares in a company that is subject to a takeover or merger.
The ATO considers these dividends ‘franked’. A ‘franking credit’ is attached to the dividend and represents the tax that has already been paid by the company distributing the dividend. The shareholder who receives the dividend with an attached franking credit will either owe less than their usual tax rate, or receive a tax refund.
Tax And Cryptocurrency
Cryptocurrency investment is also subject to taxation in Australia. Cryptocurrency is taxed in a similar way to other investment assets.
The ATO classifies four main CGT events for crypto activity.
You’ll be taxed when you:
Sell cryptocurrency.
Exchange one crypto for another.
Convery crypto to fiat currency like AUD.
Pay for goods or services in crypto.
Just like when you pay CGT at your marginal tax rate when you sell shares, you owe this rate when you sell crypto.
Capital gains are taxed for cryptocurrency investments, too.
Now that we’ve discussed the basics of tax for Australian investors, let’s explore some of the strategies that investors use to minimize investment tax.
Effective Strategies to Minimize Tax Payments
There are several legal investment strategies investors employ to minimize tax bills and claim tax deduction. This goes for both gains and income.
Below you’ll find some of the ways Australian investors hold on to as much of their investment gains and income as possible.
The following is not investment advice. As with all the information on the Navexa blog, it’s general investment information our writers have collated from other sources. For any financial or investment decisions, you should always understand the risks and seek professional advice if necessary.
Strategy 1: Hold Onto Your Investments For Longer Than 12 Months
Australian tax law makes a distinction between short and long term capital gains. A long term capital gain is when you make a profit on an investment that you’ve held for longer than 12 months.It’s ashort term capital gain if you’ve held the asset for less than 12 months.
As an investor, this is important to understand, because of something known as the ‘CGT discount’.
If you’ve held an asset for longer than 12 months before a given ‘CGT event’ occurs, you may be able to claim a CGT discount of 50%. Remember, a ‘CGT event’ is the point at which you make a capital gain or loss on an asset.
Fifty percent is a significant discount. If you made $40,000 profit from investments that you’d held for less than 12 months, and your marginal tax rate was 37%, you’d have a $14,800 tax liability.
However, if you’d held for longer than 12 months, the CGT discount rules would mean your tax liability was just $7,400 — a much more ‘tax effective’ amount.
The CGT discount applies to crypto investments, too.
As you can see, holding onto your investments for longer than 12 months to take advantage of this tax discount can be much more tax effective.
Navexa provides a platform where you can easily track your asset performance and calculate your taxable gains. The CGT Reporting Tool gives a detailed breakdown of which assets are ‘non-discountable’ from a CGT perspective and reduces the amount of tedious leg-work at tax time.
Navexa’s tax reporting tools remove the need to manually calculate their portfolio tax obligations or the most tax effective way to prepare a tax return.
Provided the portfolio data in your account is correct and up-to-date, you can run an automated tax report in just a few seconds.
Navexa’s Capital Gains Tax Tool
Navexa’s CGT reporting tool
What you see above is Navexa’s CGT Report.
Navexa calculates your taxable gains and displays a detailed breakdown. Capital gains are displayed according to Short or Long Term status alongside your Capital Losses Available to Offset. The report also calculates your CGT Concession Amount and finally, your total Capital Gain.
Navexa’s CGT Reporting Tool makes it easy to categorize your investments for your tax return, while the Unrealized Capital Gains report can help show the most tax efficient way to dispose of investments.
Strategy 2: Lower Capital Gains With Capital Losses
Another useful tool for investors at tax time is their capital losses.
You make a capital loss when you sell an asset for less than what you paid for it. This loss can be deducted from your capital gains (from other sources) to reduce the amount of tax. If you don’t have any capital gains to deduct from, the capital loss can generally be carried forward to future financial years. If you make capital gains in future years, the capital losses are still up your sleeve to deduct from any gains and reduce tax.
For example, if an investor owed $4,000 in CGT for their investments in a financial year, but had declared losses of $1,500 the previous financial year, they could carry these losses over to offset their capital gain, resulting in a reduced tax bill of $2,500.
Strategy 3: Invest In Companies That Pay High Dividends And Franking Credits
We’ve already looked at how the ATO taxes dividends, so what does this mean for minimizing your income tax obligations?
For example, an investor with a 32.5% tax rate receives a $1,750 dividend with a $750 franking credit attached. The franking credit takes the taxable income to $2,500, with gross tax of $812.50 payable. The franking credit rebate of $750 is deducted from the gross tax and the investor is left to pay only $62.50 in tax, leaving them with $1,687.50 after tax income. For a full breakdown of this and other franked dividend scenarios, click here.
As you can see, the investor in the above situation manages to retain most of dividend income. Because the franking credit offsets their CGT so significantly, the amount of income tax the individual pays is greatly minimized.
Choosing to invest in companies that pay dividends, especially fully or highly franked dividends, is a popular strategy for minimizing tax paid on investment returns. Fully franked dividends are effectively tax free income.
Navexa can also help you accelerate the process of determining your taxable income. When you automate your portfolio tracking in Navexa, the Taxable Investment Income tool provides you with everything you need to know to prepare your tax return.
Navexa’s Taxable Income Tool
As you can see above, the Taxable Income Tool displays the Unfranked Amount and the Franked Amount for your dividends, as well as the total Franking Credits attached to them.
And in the below image, you can see the additional fields in the ‘Supplementary’ section. These display further tax-relevant information such as the amount of Franked Distributions From Trusts, the amount of Assessable Foreign Source Income, and your Foreign Income Tax Offset.
Fully franked dividends are like tax free investment income!
Below these fields, you’ll also be provided with a holding by holding breakdown of your taxable investment income, like this:
Navexa’s holding by holding investment income breakdown
This shows you subtotals for payments from each holding, and grand totals for each column at the bottom.
At the top right of the report, you’ll find buttons for exporting the report as both an XLS and PDF file.
This helps you accelerate the process of preparing your investment income for assessment.
Dispose Of Your Investments In A Tax-Efficient Way
When the time comes that you want to sell it can be easy to get excited about the potential gains you are about to realize. This excitement can be dampened, however, when you are faced with the reality of your tax bill.
Choosing a particular method to dispose of your investments can have a major impact on the profits you generate and the tax you pay on them.
First-In-First-Out (FIFO)
The first-in-first-out (FIFO) approach is a common method used by investors when they sell holdings. When you purchase a group of shares at a given price, they will constitute a ‘parcel’.
You may acquire shares in the same company in several different. Each transaction will form its own parcel of shares.
The concept of FIFO relates to the disposal of investments. When you are ready to sell shares, you can choose which parcels — sometimes called ‘lots’ — of shares you would like to sell. The FIFO method involves disposing of the parcels that have been held for the longest period. Provided that the share price has risen since the time of purchase, the FIFO method will ensure the greatest capital gain from the sale of a selection of shares.
For example, if an investor purchased 100 shares at $20 in a company three years ago, and another 100 shares at $40 in the company two years ago, they might choose to use the FIFO method when they choose to sell some of those shares.
Let’s say the company’s share price has now risen to $50. The investor opts to sell using the FIFO method, disposing of the first 100 shares which were purchased at $20. Because the share price has grown $30 since they purchased them, they realize a gross profit of $3,000. However, if they had chosen to sell the more newly acquired shares parcel, they would only realize a gross profit of $1,000. The FIFO method is therefore popular with investors looking to maximise capital gains when they sell. But what about tax?
Last-In-First-Out (LIFO)
In the above example, the investor opted not to sell their more recently acquired shares because they wanted to maximise their capital gains. But if you are looking to minimize the impact of tax, adopting the LIFO approach could be advantageous.
LIFO works in the opposite manner to FIFO — your newest shares are sold first. The LIFO method ‘typically results in the lowest tax burden when stock prices have increased, because your newer shares had a higher cost and therefore, your taxable gains are less’.
Because the investor has chosen to dispose of shares that were bought at a higher price, they realize a smaller capital gain — and subsequently pay a lower tax bill.
However, don’t forget that you can only qualify for the CGT discount if you’ve held the shares that you sell for over a year.
The FIFO and LIFO approaches discussed above assume that the share prices involved have risen over time. This won’t always be the case. If the price of an asset drops over time, a smaller capital gain may be realized by selling the newly acquired shares. Smaller capital gain = less tax.
In some instances, investors might choose to dispose of a particular lot or parcel that cost more than the current share price so they can realize a capital loss. This capital loss could be used to offset other capital gains.
Regardless of the approach you choose, it is important to keep good records and understand the tax implications of disposing of the various share parcels in your portfolio.
We hope you’ve enjoyed this quick guide to investment tax and some of the strategies investors use to help minimize their tax bill in Australia.
Navexa doesn’t offer tax advice, and we always encourage you consult your accountant or seek other professional advice when it comes to investments and taxes.
Navexa is a platform where you can easily track your investment portfolio and display detailed information that will help you at tax time.
Navexa empowers investors to build brighter financial futures with simple, but powerful, automated investment analytics and reporting tools.
Features such as the CGT Reporting Tool and the Taxable Investment Income Tool can help you determine your obligations and opportunities when the time comes to pay the tax man.
Our guide to what is — and is not — taxable for cryptocurrency investments in Australia. From basics like capital gains tax from selling crypto, to paying tax on crypto staking income, declaring capital losses and understanding how the ATO treats DeFi.
If you’re buying and selling cryptocurrencies in the hope the Australian Taxation Office either won’t know about, or won’t be able to tax, your profits and income, I have bad news:
Crypto’s ‘wild west’ days — at least in terms of mainstream adoption and regulation — are gone.
While you’ll find many a tweet about how ‘it’s not too late to be early’, it is, in fact, too late to slide into what was once a murky, misunderstood world of strange new digital currencies.
(As an aside, I first heard about Bitcoin from a friend of a friend on a tram in Melbourne around 2013. That was early.)
The markets have grown exponentially since Bitcoin’s inception.
Today, the Australian government, like many others around the world, has a greater grasp on the cryptocurrency markets and blockchain technology than ever.
As you’ll see in this guide to crypto tax in 2022, as the technology and markets for digital currencies and assets grows and becomes more complex, so do the tax laws surrounding them.
Now, more than ever, Australians investing in (or trading) the cryptocurrency markets need to prepare themselves to accurately track, report and declare their activity.
As the ATO states:
‘Everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.’
This guide covers basic concepts around how the government in Australia treats digital currency for tax purposes, capital gains and taxable income, tax deductions and even tax-free digital asset transactions.
Plus, we’ll introduce some useful services and tools which may be helpful in tracking and reporting all the information the ATO requires when lodging crypto information at tax time.
Please bear in mind this article is neither tax nor financial advice. It is general information collated from credible sources, including the ATO.
Bitcoin, like other digital currencies, is subject to tax in Australia.
The ATO Knows About Your Cryptocurrency
As the crypto markets and the platforms people use to navigate them have grown in recent years, there’s been an increasing emphasis on ‘know your customer’, or KYC practices.
KYC is a way both for governments to impose regulation on crypto providers, and a way for crypto providers to communicate legitimacy — and distance themselves from the criminal activity which continues to plague the fast-evolving crypto space.
In Australia, this means you can’t register for a crypto exchange or wallet without providing documents and details that prove your identity (like your driver’s license or passport) and address.
The crypto providers, in turn, must provide details on their customers to the ATO, which began collecting details in 2019 to ensure Australians active in the crypto markets were complying with tax laws.
So if someone doesn’t declare their crypto activity, that doesn’t mean the Australian government won’t know about it. And, when someone does report it, the ATO can match what’s reported with what they have on file as a result of their data matching program protocol (the current version of which runs until 2023).
In other words, it’s probably not going to work out well for those who attempt to dodge declaring their crypto activity or paying tax on it — see here for more.
The ATO Can Legally Tax Australian Residents’ Crypto Activity
Australian tax law and the ATO have caught up to the crypto markets significantly in the past few years. As we mentioned, the wild west days are over. While Bitcoin survives, it’s now one of thousands of digital currencies.
Today, those investing in and trading ‘virtual currency’ need to accept taxation as a given, just as they would with traditional stocks and other assets.
As the crypto space continues to expand in bold new directions (while initial coin offerings were once crypto’s hottest topic, NFTs are the latest booming multi-billion dollar acronym), the tax regulation surrounding it grows ever more complicated.
Below, you’ll find introductions to many different tax scenarios surrounding various areas of the crypto markets (like DeFi and staking).
The basic premise though, is this: The ATO does not treat virtual currencies like currency at all. It’s not ‘money’ for tax purposes. They treat digital assets as property.
For the purposes of applying capital gains tax, or CGT, the ATO treats crypto like any other investment asset (like shares or property). In other cases, it will treat crypto as taxable income.
The ATO makes a distinction between two types of crypto activity.
The ATO can tax trading, staking, and other blockchain activities.
The Difference Between Investing In & Trading Cryptocurrency
As in the traditional investment markets, there’s a distinction between investing and trading in crypto, too. Some people buy some Bitcoin or Ethereum in the hope they’ll someday realize a huge profit.
Others will buy and sell frequently, perhaps even as their full-time job.
With crypto, the ATO makes this distinction between investors and traders.
How a person classifies their crypto activity has a significant impact on how they’ll be taxed on it in Australia.
You’re A Crypto Investor, If…
You are an individual buying crypto for the purpose of generating a future return. This means you buy and sell digital currencies as you would shares in a company, with the same goal — profiting from long-term capital gains as those assets rise in price.
Generally speaking, most Australians in the crypto space would be classed as investors by the ATO.
You’re A Crypto Trader, If…
You use crypto activity to make an income from a business. This includes short-term buying and selling, mining crypto, and operating an exchange, for example. Whatever proceeds you generate from your crypto business activities, the ATO treats as taxable income.
Obviously, given the ATO’s oversight on crypto activity in general, both of these use cases demand detailed record keeping, regardless of how seriously or casually one is active in the market.
The big difference from a tax perspective is that while investors can qualify for capital gains tax discounts (resulting from holding an investment longer than 12 months), traders cannot, since their crypto profits are classed as taxable income, not capital gains.
For the purposes of this explainer post, we’ll focus on crypto investing, not trading.
Which Crypto Activity Does The ATO Tax?
In short, everything. The ATO classifies four main CGT events for crypto activity.
You’ll be taxed when you:
Sell cryptocurrency (or gift it to someone).
Exchange one crypto for another.
Convert crypto to fiat currency like AUD.
Pay for good or services in crypto.
These are just the main taxable events the ATO looks at. We’ll get to the more complex scenarios shortly.
First, it’s worth noting that the ATO doesn’t consider a digital crypto wallet as an asset. Rather, it treats the individual crypto assets within a wallet as separate CGT asset (the same way that an investment portfolio is not taxable — the investments within it are).
There are some similarities between cryptocurrency taxation and traditional investment taxation.
Paying Tax On Crypto Capital Gains
Australians pay capital gains tax on their crypto investments at the same tax rate they pay on their personal income for the financial year.
So, for example, if someone earns $100,000 from their employment and makes a $20,000 profit from selling some Bitcoin and Ethereum, they’d held for less than 12 months, their capital gains tax rate would be 32.5%.
This means they would be taxed $6,500 on the capital gains they realized by selling their crypto.
It’s important to note that capital gains tax rates differ for individuals, companies and self-managed superannuation funds in Australia.
Australian tax law makes a distinction between long term and short term capital gains. This effectively incentivizes investors to hold investments for more than a year.
In the example above the investor has held their Bitcoin and Ethereum for fewer than 12 months before selling and realizing their capital gain.
This means they pay the same tax on their crypto gains as they do their personal income (for tax purposes, capital gains profits are added to other income to determine the tax rate).
But if they held the Bitcoin and Ethereum for more than 12 months, they’d qualify for a 50% CGT discount.
So, instead of paying $6,500 of their $20,000 capital gain, they’d only need to pay $3,250 — substantially less money.
Learn more about capital gains tax obligations in Australia here (ATO) and here (NAB).
Declaring Capital Losses On Crypto
Of course, people don’t always sell cryptocurrency for a capital gain. If someone bought 100 Solana at $100, got excited when it rose to $150, but then panicked when the coin dipped back to, say, $70, they might choose to sell to stop any potential further losses.
In that case, they’d be selling for $7,000 a crypto investment they paid $10,000 for in the first place — realizing a $3,000 capital loss.
Firstly, they don’t need to pay any tax on the $7,000 they received from selling the asset, since it represents a loss. Secondly, they can deduct that $3,000 loss from any other capital gains they might declare in the same — or a future — financial year.
Going back to the previous example, assuming someone needed to pay a $6,500 capital gains tax on their crypto profits, but had in the previous year realized a $3,000 loss, they could apply that loss in their current tax return, bringing the total payable CGT on their crypto down to $3,500.
Declaring a capital loss on crypto can allow an investor to offset gains they may have realized not just on other crypto, but on shares or property. They cannot, however, carry them over as a deduction on regular income.
Crypto-to-crypto trades are generally considered CGT events in Australia.
Paying Tax On Crypto-To-Crypto Transactions
The ATO doesn’t just view selling crypto for fiat currency (like AUD) as a CGT event. It also requires Australian investors report any crypto-to-crypto transactions for capital gains tax.
Remember, for tax purposes in Australia, every asset within a digital wallet is considered a separate CGT asset. So when people trade between different assets within a wallet or on an exchange, they need to track and record this like any other investment CGT event.
Since crypto is effectively property as far as the ATO is concerned, its value is based on a given currency’s market value at a given time.
Here’s an example to illustrate crypto-to-crypto tax in action:
Crypto-Crypto CGT Example
An investor trades some ETH for some SOL.
Say they bought $2,000 worth of ETH. Over three years, their $2,000 investment rises to $6,000.
Then, they trade it for $6,000 worth of SOL. By doing so, they realize a capital gain of $4,000, because they’re effectively ‘selling’ out of their ETH investment. It’s just that they’re realizing their gain in SOL, as opposed to AUD.
So while they don’t convert any crypto back into AUD, they still need to declare this trade as a CGT event when they file their tax return.
Similarly, had their ETH investment fallen by 50% to $1,000, and they’d traded that for SOL, they’d be able to declare a capital loss of $1,000.
Transferring crypto between different digital wallets is not a taxable event in Australia, since people don’t realize a capital gain by doing so.
Staking = taxable income
Crypto Staking Rewards = Taxable Income
Crypto ‘staking’ is a blockchain mechanism whereby holders of particular cryptocurrencies can contribute to the coin’s blockchain by making their coins available to help validate transactions.
If that’s too complex, don’t worry. The simpler way to think of crypto staking is like a savings account that pays interest.
When you stake crypto, you earn more of that crypto back as a percentage of the amount you choose to stake on its blockchain.
For example, say I have 100 SOL worth $10,000 ($100 each) and I choose to stake it at a rate of 7% per annum. Nine months later, I ‘unstake’ my SOL and receive an extra 5.25 SOL in staking rewards.
Let’s say in the nine months I staked my SOL, the value rose 50%.
So when I receive my new 5.25 SOL, they’re worth $787.50 — the market value at the time I receive them.
How To Treat Staking Rewards For Tax Purposes
Unlike the other transactions we’ve looked at so far in this post, the ATO considers staking rewards as ordinary taxable income.
This is different from a capital gain. In this case, the $787.50 gets added to my regular income (like my salary, for example) and taxed at the appropriate personal tax rate.
In other words, it’s taxed like interest I might earn from keeping money in a savings account.
But, were I to sell the extra SOL I earned by staking my initial investment, I would have to pay capital gains tax on that — although the base price would be the market value at the time I received it, not the price I paid for the initial investment.
Crypto Tax On Decentralized Finance (DeFi)
Decentralized Finance, or DeFi, is one area of crypto where Australian tax policy is seemingly still playing catchup.
DeFi is, in basic terms, is the finance marketplace on the blockchain. As the name suggests, this is finance without centralization — or intermediaries like banks, finance brokers or credit card companies.
DeFi protocols allows people to lend and borrow capital through blockchain-based peer-to-peer financial networks.
While you could argue DeFi is still in its infancy, reports suggest there is already nearly $1 trillion ‘locked’ into DeFi protocols such as Aave (AAVE), Solana (SOL) and Uniswap (UNI).
At this stage, while the ATO doesn’t have any specific guidance as yet, this doesn’t mean that DeFi activity can’t be taxed.
If someone uses a DeFi protocol to earn crypto, chances are the ATO would consider this taxable income. And like crypto staking, if they sold or traded any crypto earned through DeFi, this would trigger a CGT event.
This excellent guide details the possible tax implications of various DeFi actions.
Crypto investors are entitled to certain tax breaks in Australia.
Tax Breaks For Australian Crypto Investors
It’s not all tax obligations when it comes to crypto activity for Australian investors.
As with traditional investments, there are three main ways the ATO offers tax relief.
The first is the standard personal income tax break on the first $18,200 of personal income. While it’s probably unlikely someone in the crypto markets would make less than that in a financial year, it is, technically possible to pay no tax on crypto gains in this respect.
Second, the 50% capital gains tax discount is not to be underestimated. If someone realized $100,000 in gains on crypto they held less than 12 months, and that gain is taxed at the highest rate (45%), they’ll net just $55,000.
But, if they tactically hodl longer than 12 months before realizing the gain, that $45,000 tax bill comes down to $22,500 — meaning they keep $77,500. This is a significant financial difference when you consider that the difference between ‘less than’ and ‘more than’ 12 months is a single day.
The third way Australians can qualify for a crypto tax break is through personal use. The window for claiming crypto activity as personal use is quite small. Basically, if someone buys up to $10,000 worth of crypto and then immediately buys something else with it, they can claim personal use (as opposed to investing for a future gain).
As with everything when it comes to crypto tax, it’s always important to closely track and record every transaction. The burden of proof is on investors to produce the records required to prove what they claim in their tax return.
Tax-Free Crypto Transactions? They Exist!
Not only are there tax breaks available to those investing in crypto in Australia — there’s even a list of crypto transactions that trigger no tax events.
These are, of course, transactions in which the person probably won’t make a significant profit.
Australian investors won’t pay crypto tax when they:
Buy cryptocurrency
Receive cryptocurrency as a gift
Give cryptocurrency as a charity donation
Hold cryptocurrency (even if it goes up 10,000%)
Receive cryptocurrency from ‘hobby’ mining
Move cryptocurrency between digital wallets
Buy goods and services up to the value of $10,000 using cryptocurrency (see the personal use scenario above)
Where To Find Tools & More Information About Crypto Tax In Australia
It might seem difficult to understand the nuances of crypto tax law in Australia. But the reality is that for the average crypto investor —someone who buys and sells crypto with the objective of making some money — it should be pretty straightforward.
By and large, you could apply the same tax rules to your crypto portfolio as you would for investments in stocks.
If you sell an investment for a capital gain, you’ll need to pay a capital gains tax.
If you make money from an investment, you’ll need to declare it as income and pay tax at the marginal rate applied to your total income for the financial year.
But, as you’ve seen in this post, things can quickly grow more complex the deeper you get into the crypto markets.
Here at Navexa we’re proponents of continuously searching for and acquiring financial literacy.
Here are some resources we consulted in putting this guide together that may help you with your own crypto investing and tax reporting:
As always, seek professional advice and support when considering investing and its tax implications!
Navexa helps speed up the crypto tax reporting process
Navexa: Automated Tracking For Crypto Capital Gains & Income
If you’re investing in cryptocurrencies and you’d prefer a quick, automated way of not only tracking your portfolio performance and returns, but also of generating comprehensive, accurate tax reports, try Navexa.
We’ve developed Navexa to give investors radical insight into how their portfolio performs over time.
Not only does the platform break down your total return by capital gains and dividend income, it calculates the impact of trading fees on your portfolio performance.
As you may already know, trading fees can have a massive impact on crypto transactions. The Ethereum blockchain has been notorious in recent years for slapping users with transaction fees which often outweigh the value of the coins being transacted.
If you don’t consistently and accurately track the impact of fees on your crypto investments, you may end up with a distorted picture of how they’re performing.
Proper tracking is also a requirement if you find you need to provide detailed information to the ATO regarding your tax return. As we outlined above, you need to be able to show the fine details of transactions to substantiate capital gains, losses and income that you’re claiming in a tax return.
While you can pull this information together using data from exchanges and wallets, Navexa allows you to consolidate your crypto portfolio data even if you trade across multiple platforms.
Remember the 50% capital gains discount the ATO offers on crypto investments held longer than 12 months? If you’re filing a tax return containing 100 trades off various sizes across 100 different dates within the financial year, calculating which qualify for the CGT discount could quickly become a headache.
With Navexa’s tax reporting tools, this calculation is completely automated — your account gives you a detailed breakdown of which holdings qualify and which do not in a single click (so long as all your portfolio data is accurate and up to date!).
We’ve built (and are constantly) developing Navexa’s analytics and reporting tools to empower investors in stocks and crypto to get powerful insights into their portfolio performance and make calculating and reporting tax details fast and easy.
