Tax-loss selling allows you to offset capital losses against capital gains. Find out how it works.
Tax-loss selling
Prudent investors always aim to sell their investments (i.e. capital assets; stocks, bonds, real estate) at capital gains. However, this objective is not always achieved due to factors ranging from economic uncertainty, geopolitical tensions or any other scenarios which may cause the price of the capital asset to decline.
Nevertheless, using a strategy known as tax-loss selling, it can be beneficial to sell an investment at a loss. Assume, an investor sells stocks during the current year and realizes some capital gains and some capital losses. In such a situation, the investor can offset capital gains against capital losses, and in turn lower or avoid any tax payable on capital gains.
Offsetting capital gains against capital losses
In Canada, capital gains and losses realized in a particular year are taxable or deductible at an inclusion rate of fifty percent. For example, offsetting a current year capital gain of $500 against a current year capital loss of $200 would result in taxable capital gain of $150 [($500 - $200) X 50%]. On the other hand, offsetting a current year capital gain of $200 against a current year capital loss of $500 would result in a net capital loss of $150 [($200 - $500) X 50%]. This net capital loss can be used to lower your capital gains in the preceding three taxation years or carried forward indefinitely to be applied against capital gains.
Superficial loss
In order to take advantage of tax-loss selling, it is critical to keep in mind that a superficial loss is not realized. Superficial occurs when an investment sold for the purpose of tax-loss selling, is repurchased within 30 days of the sale. If such a repurchase is undertaken it would result in the capital loss being denied and instead it would be added to the adjusted cost base of the purchased investment.
Conclusion
Although tax-loss selling is an effective strategy to lower your taxes, you should not sell your investments simply for the purpose of reducing your taxes for the year. Instead, you should carefully evaluate your long-term investment objectives.
For professional advice contact Alpha Accountzy, Accounting & Tax Solutions.
