Are your investments underperforming this year? Contrary to what you might think, it could be the perfect time to utilize a tax-saving technique known as tax-loss harvesting. As the tax-loss harvesting deadline nears, understanding its complexities and rules is crucial.
Tax-loss harvesting involves intentionally selling assets at a loss to offset gains in other investments, effectively reducing or even nullifying your investment tax liabilities.
“This strategy turns a loss into an opportunity,” says Jason Pereira, a senior financial planner. It applies to assets liable for capital gains tax, like stocks, bonds, ETFs, mutual funds, and some real estate, but not to primary residences or assets in RRSPs or TFSAs.
“Losses in registered accounts are absorbed,” Pereira notes.
Realized capital losses are first offset against the same year’s capital gains. If excess losses exist, they can be carried backward for three years or forward indefinitely.
“In 2022’s down market, this tactic was highly beneficial,” Pereira recalls, citing significant client tax refunds.
Frank Di Pietro, a tax and estate planning expert, advises starting with the oldest gains to maximize benefits. He also suggests considering previously unused losses.
A crucial aspect is the superficial loss rule. Selling an asset at a loss and repurchasing it within 30 days (including 30 days before the sale) nullifies the loss for tax purposes. This rule also applies to purchases by affiliated individuals or entities.
To circumvent this, investors might buy similar but not identical assets.
“Selling Coke to buy Pepsi is a classic move,” Pereira states, noting industry-wide effects on similar investments.
While tax-loss selling can be advantageous, particularly if you’re pessimistic about an investment or seeking stability, it’s not universally suitable. Pereira warns it could merely postpone taxation, potentially leading to higher future tax liabilities. Factors like transaction costs and timing also play a role.
Pereira and Di Pietro emphasize the need for personalized financial advice before proceeding with tax-loss selling.
