It is what is referred to as “tax-loss harvesting,” and here is how it works: In a non-registered account, when you a sell a security that has declined in value, you realize a capital loss. You can use capital losses to offset any capital gains you’ve incurred in the current year, which can reduce your tax bill.
Not only does it potentially help in terms of cleansing one’s portfolio of laggards and allocating freed capital to other investments that may have more upside potential, it can also provide a healthy offset to capital gains. Unused losses can be carried back up to three years, or carried forward indefinitely to offset future capital gains.
With financial markets moving steadily upward over much of the past three-plus years, there weren’t too many tax losses to harvest. But with September and part of October proving more challenging for stocks, there may be some tax-loss selling opportunities to benefit from.
To be sure, before selling all of your underperforming stocks en masse to trigger a tax loss, it is important to be aware of various rules, deadlines and other criteria.
One important rule is the so-called superficial loss rule, which stipulates that an investor must wait a minimum of 30 days before repurchasing the same investment. The idea is to prevent taxpayers from taking the tax benefit of selling their losing assets with the intention of buying them right back.
Another is ensuring there is an actual benefit to undertaking a tax-loss harvesting strategy. If you have minimal or no capital gains for 2014, or have already reported capital gains on prior tax returns over the past three years, it may not make sense to pursue the strategy, though capital losses can be carried forward indefinitely to offset future capital gains.
The key to tax-loss harvesting, however, is being both tactical and strategic – first and foremost being comfortable about removing a stock or security from your portfolio.
If there is a more than remote likelihood that the stock could recover, the tax-loss harvesting may not reap as much benefit as holding on to the stock for a longer period of time. If the plan is to buy back the stock at a later time, the higher potential re-purchase value and transaction costs could negate the taxable benefit of selling it.
December 24, 2014 is the last day to execute a trade on a Canadian stock exchange that would be settled in 2014. December 26, 2014 is the last day to execute a trade on a US stock exchange that would be settled in 2014. Any trades made after those dates would settle in 2015 – too late to be used for tax-loss selling for the 2014 tax year.
1 Sub-Advisor of Sprott Bridging Income Fund LP The Fund is generally exposed to the following risks. See the offering memorandum of the Fund for a description of these risks: speculative investments; limited operating history for the partnership; distributions and allocations; class risk; possible loss of limited liability; repayment of certain distributions; limited partners not entitled to participate in management; dependence of manager on key personnel; reliance on manager; dependence of sub-advisor on key personnel; reliance on sub-advisor; limited ability to liquidate investment; possible effect of redemptions; tax liability; charges to the partnership; potential indemnification obligations; not a public mutual fund; changes in investment strategies; valuation of the partnership’s investments; lack of independent experts representing limited partners; no involvement of unaffiliated selling agent; general economic and market conditions; unspecified investments; competitive environment; illiquidity of underlying investments; credit risk; impaired loans; no insurance; non-controlling investments; joint ventures and co-investments; litigation; fixed income securities; equity securities; possible correlation with traditional investments; idle cash; currency risk; concentration; indebtedness. Sprott Asset Management LP is the investment manager to the Sprott Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, other charges and expenses all may be associated with investment funds. Please read the offering memorandum carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.