Tax Loss Selling

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
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CROCKD
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Tax Loss Selling

Post by CROCKD »

When does this ever make sense unless you think you need to get out of a particular stock(s)?
An article I read somewhere recently by some online advisor? said that now the market was down so far one could take advantages? of losses by carrying them back against capital gains.
I know you can carry back losses 3 years and did so sometime in the past. Don't remember the exact procedure but believe you file a T1adj. for a prior year.
As I had capital gains both in 2014 and 2013 I decided to test the effect by running my tax software for those years by increasing the amount on Line253 to be the same as the amount I had on Line127 - the capital gain.
So if I generated a capital loss in 2015 I could carry it back AFTER it had been netted out for Capital Gains in the current year (2015)
In my particular case I have to generate a loss of about $4000 to carry back to get a tax refund of about $700. :roll:
Does not seem a good strategy to me.
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Re: Tax Loss Selling

Post by AltaRed »

It depends on a particular situation. In my case, I had big cap gains in 2013 on an RE sale that put me in a higher tax bracket and so, it makes a lot of sense to me to generate tax losses to file a T1ADJ for that year. I did that last year to some degree and might do it again this year swapping out a few of my reset prefs to grab that MTR advantage.
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Re: Tax Loss Selling

Post by scomac »

I had the big tax hit for s deemed RE sale last tax year. For me, every dollar of capital loss I can generate is worth quite a bit to me, far more than the resultant gain's liability is likely to be worth in the future.

I've been working at crystallizing these losses for over a month now and seem to have that harvested now depending upon where the market heads from here. I tend to view harvesting these losses as collecting free money so have always been diligent in doing so.
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Re: Tax Loss Selling

Post by SQRT »

Harvesting tax losses makes sense when you can lower the rate of tax on either previous gains or expected future gains. If you expect you tax rate to be the same it only makes sense to sell the security for a loss of you don't want to own it anymore, it seems to me. Perhaps if you are near the year end there might be a little incentive to crystallize a loss for immediate cash flow effect when filing.

For a guy like me whose tax rate will increase by almost 5% in 2016 ( say 2% cap gains) (Alberta) vs previous years it still doesn't seem worth it to sell now if I like the stock's prospects.
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Re: Tax Loss Selling

Post by SoninlawofGus »

Another time to consider it is when you are simplifying your portfolio -- offsetting losers with winners. I have a number of very successful stock picks along with some real losers. I've never really be a stock picker, or I kind of suck at it anyway, and while my winners have outgained my losers, my returns are pretty much right at the index rates. It's a zero sum game for me. As such, as I inch toward retirement, I've decided to gradually consolidate my holdings back into index funds and ETFs.
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Re: Tax Loss Selling

Post by BRIAN5000 »

I guess everyone but me knew this FFS !##$&@&8 Settlement date not sale date !!!

http://www.moneysense.ca/taxes/3-tax-lo ... -remember/

2. Remember, a buy-back will cost you
Second, it’s important to remember that if you buy back the stock within 30 days of the settlement date of the sale, the CRA will consider it a “superficial loss” that can’t be used to offset capital gains. The CRA also keeps an eye out for fancy footwork on this front. So, don’t go trying to buy back the shares early in another account or indulging in some other tomfoolery.
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Re: Tax Loss Selling

Post by Peculiar_Investor »

As luck would have it, today I've been editing Tax loss harvesting - finiki, the Canadian financial wiki so I've added the link to Norm's article. Thanks to Brian and of course Norm.
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Re: Tax Loss Selling

Post by AltaRed »

Brian, I have used Transaction Date for my Buy/Sell dates (for the last 100 years). It is not at all logical for me to use Settlement date since the stock could have moved 20% from my purchase price by Settlement Date. As long as the date used is consistent, CRA does not care.
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Re: Tax Loss Selling

Post by kumquat »

I'm looking for confirmation that the CL can be carried forward 'forever'. Anyone have a link?
I don't intend to offend anyone, that part is just a bonus.

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Re: Tax Loss Selling

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kumquat wrote:I'm looking for confirmation that the CL can be carried forward 'forever'. Anyone have a link?
Don't know if you consider this definitive. It is to my mind:
You can use a net capital loss to reduce your taxable capital gain in any of the three preceding years or in any future year.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... u-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... u-eng.html
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Re: Tax Loss Selling

Post by OnlyMyOpinion »

I notice a few recent comments on tax loss selling in the What did you sell? thread (http://www.financialwisdomforum.org/for ... 39#p587339).
My approach the last few years in our equity portfolio has been to sell a few dogs that I no longer have an interest in holding as well as some underwater prefs. Generally the funds were redeployed to better priced prefs.
I then matched the overall losses with gains by selling a portion of my winners so there are no net gains/losses for the year. I immediately buy back my positions in the winnners which resets their ACB to a higher value. The $9.99 sell/buy commission isn't material to the values.
I don't expect our portfolio will be amenable to this approach every year but it has been for 2015, 2016.
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Re: Tax Loss Selling

Post by SQRT »

With the recent run up, I don't have any losers left.
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Re: Tax Loss Selling

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OnlyMyOpinion wrote:I then matched the overall losses with gains by selling a portion of my winners so there are no net gains/losses for the year. I immediately buy back my positions in the winnners which resets their ACB to a higher value.
Why would you do that?
Unused capital losses have a value, why burn it this year just for the sake of burning it?

Together with undeducted RRSP contributions, it's one of the few items whose use is truly discretionary in future years; I appreciate the flexibility of being able to fine tune the taxable income to all the brackets, credits etc.
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Re: Tax Loss Selling

Post by gsp_ »

adrian2 wrote:
OnlyMyOpinion wrote:I then matched the overall losses with gains by selling a portion of my winners so there are no net gains/losses for the year. I immediately buy back my positions in the winnners which resets their ACB to a higher value.
Why would you do that?
Unused capital losses have a value, why burn it this year just for the sake of burning it?
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Re: Tax Loss Selling

Post by OnlyMyOpinion »

adrian2 wrote:
OnlyMyOpinion wrote:I then matched the overall losses with gains by selling a portion of my winners so there are no net gains/losses for the year. I immediately buy back my positions in the winnners which resets their ACB to a higher value.
Why would you do that? Unused capital losses have a value, why burn it this year just for the sake of burning it? Together with undeducted RRSP contributions, it's one of the few items whose use is truly discretionary in future years; I appreciate the flexibility of being able to fine tune the taxable income to all the brackets, credits etc.
Thanks for the comment. That is why I posted, to see if this made sense, and/or other approaches/suggestions.

We are in the decumulation phase now so RRSP contributions are moot. We are in the position that we intend to gift the bulk of our unregistered portfolio to family over the next 10 years, so I have begun trying to crystalize and offset capital gains on an incremental, ongoing basis rather than wait and take a potentially large hit in the year(s) we gift out assets. The opportunity to use the underwater prefs now for this purpose seemed to make sense.
We will face cg's regardless, the overall portfolio growth is too large to fully offset. We also have a house east of TO to be sold in the next few years that will create a large cg. We'll be looking at a charitable donation to reduce the tax consequences.

As an aside, one of my concerns (but not driving our decisions so far) is that the Feds will find it convenient to tax cg's more heavily in the future to pay for their many recent 'investments'.
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Re: Tax Loss Selling

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OnlyMyOpinion wrote:We are in the position that we intend to gift the bulk of our unregistered portfolio to family over the next 10 years, so I have begun trying to crystalize and offset capital gains on an incremental, ongoing basis rather than wait and take a potentially large hit in the year(s) we gift out assets. The opportunity to use the underwater prefs now for this purpose seemed to make sense.
We will face cg's regardless, the overall portfolio growth is too large to fully offset. We also have a house east of TO to be sold in the next few years that will create a large cg. We'll be looking at a charitable donation to reduce the tax consequences.
All of the above does nothing to change my advice.

Accumulate unused losses now, and use them on a discretionary basis in the future, e.g., the year of the house sale, or future gifts, etc. There is nothing positive that I can see in your initial proposal. Retaining flexibility is a good thing.
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Re: Tax Loss Selling

Post by DavidR »

OMO, stepped up cost bases are nice, but the benefit may not be realized for many years. (Maybe the stocks with the stepped up bases will be last ones sold.) Wouldn't it be better to have the unused losses available for a year when large gains are realized, for an 'immediate' tax saving...?
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Re: Tax Loss Selling

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adrian2 wrote:
OnlyMyOpinion wrote:We are in the position that we intend to gift the bulk of our unregistered portfolio to family over the next 10 years, so I have begun trying to crystalize and offset capital gains on an incremental, ongoing basis rather than wait and take a potentially large hit in the year(s) we gift out assets. The opportunity to use the underwater prefs now for this purpose seemed to make sense.
We will face cg's regardless, the overall portfolio growth is too large to fully offset. We also have a house east of TO to be sold in the next few years that will create a large cg. We'll be looking at a charitable donation to reduce the tax consequences.
All of the above does nothing to change my advice.

Accumulate unused losses now, and use them on a discretionary basis in the future, e.g., the year of the house sale, or future gifts, etc. There is nothing positive that I can see in your initial proposal. Retaining flexibility is a good thing.
Another :thumbsup: just to emphasize
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Re: Tax Loss Selling

Post by ghariton »

I agree that discretion on the timing of the use of tax losses is valuable. But I have a different question. Is it worth while to crystallize tax losses before wanting to use them? Say my stock X would give me a tax loss of $1000 if I were to sell now. If I don't want to use that tax loss now, and I don't have a different good reason to sell X now, is it still worthwhile to sell and save up the $1000 for later? Or should I still hold on to X (assuming no other reason to sell) until the time I do want to use the tax loss against some other income>

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Re: Tax Loss Selling

Post by DavidR »

George, for potential tax savings of $250 I wouldn't bother. Lie down until the feeling passes..
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Re: Tax Loss Selling

Post by BRIAN5000 »

DavidR wrote:George, for potential tax savings of $250 I wouldn't bother. Lie down until the feeling passes..
Rule of thumb, by portfolio size, transaction size, minimum amount?

I have an unavoidable $35,000 CG this year so I made sure to tax loss sell enough to cover it :( .
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Re: Tax Loss Selling

Post by DavidR »

BRIAN5000 wrote:Rule of thumb, by portfolio size, transaction size, minimum amount?
$250 is not material to me. You've got to figure out what's material to you. Rules of thumb are not meant to apply the same to everyone.
BRIAN5000 wrote:I have an unavoidable $35,000 CG this year so I made sure to tax loss sell enough to cover it :( .
Not the same thing as George's question, but I'll comment anyway - if you're in the top tax bracket this year, then sure, why not sell some losers. Unless of course you think the tax rate on capital gains will be higher next year, and/or you want to make a bunch of assumptions about future tax rates, future changes in value of portfolio, whether or not you will need or want to sell anything or be forced into any dispositions, time value of money, etc. YMMV
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Re: Tax Loss Selling

Post by ghariton »

DavidR wrote:Not the same thing as George's question
I was using small numbers so as to make the arithmetic easy. I quite agree that for the sums I cited, nothing need be done. My hope was to scale up any insights.
if you're in the top tax bracket this year, then sure, why not sell some losers. Unless of course you think the tax rate on capital gains will be higher next year, and/or you want to make a bunch of assumptions about future tax rates, future changes in value of portfolio, whether or not you will need or want to sell anything or be forced into any dispositions, time value of money, etc. YMMV
All good advice. But it doesn't really answer my question. If I have a stock in a taxable account which is currently showing a $100,000 loss, should I sell it now? I still like the stock, especially at this price, so I will use the money to replace the stock with a close substitute. (If stocks are not close enough substitutes, think of replacing XIC with VCE and crystalizing the loss on XIC.) I could then "save" the $100,000 loss and use it in a future year when it gives me the most reduction in my taxes (say that works out to five years in the future).

Alternatively, I could continue to hold the original stock. I will crystalize the loss in five years as before. Only now, my stock will have moved up. I will have a reduced loss of $50,000. So that means I can shelter less income from elsewhere. On the other hand, I won't have an uncrystalized capital gain of $50,000 on my substitute stock. (Again, think of a capital loss of $50,000 from the later sale of XIC versus a capital loss of $100,000 from the earlier sale of XIC plus an uncrystalized $50,000 gain on VCE.)

Does the larger capital loss carry forward give me a tactical advantage in arranging my affairs to minimize taxes? I guess the answer is "Yes". Am I right?

If so, we should crystallize every capital loss as soon as possible, assuming we can find an alternate security if we want to continue with that security. Build up a "slush fund" of capital losses to be used opportunistically.

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Re: Tax Loss Selling

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ghariton wrote:Does the larger capital loss carry forward give me a tactical advantage in arranging my affairs to minimize taxes? I guess the answer is "Yes". Am I right?
Yes.
ghariton wrote:If so, we should crystallize every capital loss as soon as possible, assuming we can find an alternate security if we want to continue with that security. Build up a "slush fund" of capital losses to be used opportunistically.
Yes (within practical reasons).
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Re: Tax Loss Selling

Post by DavidR »

I see that when the amounts are material enough, George is willing to put his thinking cap on :wink:
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