There's just under one month to go until the end of the 2025 financial year. This is the right time to consider whether this is a good time to sell stocks that are in the red.

The stock market has had a strong run in the last few months, so plenty of ASX stocks are close to 2025 highs, 52-week highs or even all-time highs. As the chart below shows, the S&P/ASX 200 Index (ASX: XJO) is not far off its all-time high.

So, any ASX shares in our portfolio that are currently showing a capital loss are probably having a bad time for some reason.

The question is – what should we do with those stocks?

Is the ASX stock likely to recover?

I wouldn't sell something before the end of the 2025 financial year just because it's down, or for tax loss reasons. I'd want to analyse the situation, there is usually a reason why a share price has fallen.  

Has a decline in the resource price hurt an ASX mining share? For example, businesses like BHP Group Ltd (ASX: BHP) and Fortescue Ltd (ASX: FMG) have suffered from a lower iron ore price.

Is a business losing market share?

Have costs jumped because of inflation?

Has a company lost a key contract?

Have high interest rates hurt a real estate investment trust (REIT) or consumer discretionary demand?

Are the challenges in the healthcare sector (in Australia or the US) harming prospects for the foreseeable future?

Depending on the business, some factors could reverse quickly, and others may take longer to turn around. Some may never turn around.

For ASX stocks exposed to interest rate cuts, I'd want to hold on because a number of rate cuts are predicted for the next 12 months, which could be a strong tailwind for rate-sensitive businesses.

Many resource prices tend to perform cyclically, so it's possible ASX mining shares could rebound.

However, I'd be very willing to sell a business before the end of the 2025 financial year that seems to be irreversibly going backwards, as that money could be invested in an ASX stock that has a better chance of rising.

As Warren Buffett once said:

            You don't have to make it back the way you lost it.

Wash selling is not allowed

While it's entirely acceptable to sell stocks at a loss, the Australian Taxation Office (ATO) does not want to see investors selling shares at a loss for a tax benefit in the 2025 financial year and then essentially repurchasing them shortly afterwards.

The ATO states:

Wash sales typically involve the disposal of assets such as crypto and shares just before the end of the financial year, where after a short period of time, the taxpayer reacquires the same or substantially similar assets. This is a wash sale and is done to create a loss to offset against a gain already derived, or expected to be derived, in certain circumstances, in a tax return.

A wash sale is different from normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year. The taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital gains loss and obtaining an unfair tax benefit.

The ATO's sophisticated data analytics can identify wash sales through access to data from share registries and crypto asset exchanges. When the ATO identifies this behaviour, the capital loss is rejected, resulting in an even bigger loss to the taxpayer.

Therefore, it's essential to ensure that any sale of stocks for a loss before the end of the 2025 financial year (or any other year) is made for the right reason.