Tax-loss selling is the strategy of triggering losses on investments before
Dec. 31 to offset capital gains that you may have on other investments for
2018. So, the real question is, How do you trigger a loss?
One easy way is to look at the stocks and other investments in your
portfolio now, to see which are in a loss position or likely to be by
year-end (i.e., where the current market value is less than the original
cost). By selling investments in a loss position, you can trigger a capital
loss for tax purposes.
Yes, it means that you aren’t making any money from these sales, but it
also means that the resulting loss can be used to offset capital gains,
which at the end of the day translates into cutting your tax bill.
Sounds simple doesn’t it? But before you place your sell order between now
and the end of the year, here are some things to watch for:
* Do you need a tax loss?
If you don’t have any capital gains as far back as 2015, there’s no need to
run out and sell a loser just for its tax loss. That’s because capital
gains can be claimed only against capital losses. For most investors, the
result will be a capital loss. A capital loss cannot shelter income from
your job, a business, or even an employee stock option benefit. So, if you
have no capital gains in the current year, or in the last three years
(capital losses can be carried back three years, to 2015), then there’s no
point in tax-loss selling. (A possible exception applies to losing
investments in Canadian private corporations devoted to active-business
endeavours – this could include over-the-counter stocks.)
Do you have a tax loss?
Don’t assume that you are sitting on losses. Find out whether you actually
have a tax loss to begin with. This depends on the tax cost of your
investment – or as we tax drones call it, your “adjusted cost base.” One
important thing to bear in mind is that you must calculate your tax cost on
a weighted average basis for all identical investments.
Let’s say that you bought 2,000 shares of Xco at $20 per share and another
block of 1,000 at $40. Let’s also suppose that you decided to take your
lumps on the second purchase, and you sold the block of 1,000 at $30. Your
loss would be $10 a share, right? Wrong! You have to calculate your cost on
the weighted-average basis. Since most of your shares were bought when the
stock was below its selling price, the weighted average cost per share
would be $36.67 – that is (2,000 x $20 + 1,000 x 40)/3,000, so that
apparent $10 loss would turn into a $3.33 gain per share!
You must use this approach even if you used a different broker for each
Happily, though, initial purchases by other family members will not figure
in the weighted average calculation. For this reason, it may make sense to
have other family member make the initial purchases, in order to “isolate”
cost base in each per- son. In the previous example, if your spouse had
purchased the second block at $40 and had sold it, your spouse’s adjusted
cost base would have been based on the $40 amount.
Advanced strategies for tax-loss selling.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a
Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of
Tax and Family Business Succession Planning, 3rd Edition . She is also
co-editor of various Wolters Kluwer Ltd. tax publications.
Portions of this article first appeared in The TaxLetter, © 2018 by MPL
Communications Ltd. Used
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.