Tax-loss selling comes with a raft of potential benefits, but it nevertheless has some strings attached — deadlines, for example.
As 2018 comes to a close, investors may want to consider looking at tax-loss selling and how to use the strategy to their benefit.
To review: buying stocks low and selling them high is ideal, but sometimes investments go sour. In such cases all hope is not lost — investors have the option to “sell shares held in a non-registered account that have dropped in value, thus incurring a loss when sold.” They can then use the money to “offset other capital gains incurred throughout that year.” This is the principle behind tax-loss selling.
For example, if an investor bought 1,000 shares of a company for $53 each, they could sell the shares and take a loss of $3,000 in the event that they declined in value to $50 each. The $3,000 loss from the sale could then be used to offset gains elsewhere in the investor’s portfolio.
As the Globe and Mail states in a recent article on the subject, tax-loss selling is essentially a way for investors to “reduce their tax bill.” For more experienced investors, it can also be a way to reap the benefits of a reduced tax bill, then enjoy future gains by buying back jettisoned stocks at a later date, when they’re on the rise again.
Save the date for tax-loss selling
Tax-loss selling comes with many potential benefits, but it nevertheless has some strings attached. The key thing for investors to remember is that it has a deadline.
For both Canada and the US, the last day for tax-loss selling in 2018 is December 31; however, investors should remember to make any trades at least two to three days ahead of time so there’s time to process them. Investors still hoping to take advantage of this strategy will have to make their trades soon, as the deadline is less than a month away now.
The flip side of tax-loss selling
On the flip side, investors should be aware that as tax-loss selling gets underway, opportunities also tend to open up for investors who have spent the year on the sidelines.
In her piece “How Bout Tax Loss Buying?,” Gwen Preston, publisher of the Resource Maven newsletter, explains that Canaccord Genuity has found that from mid-November to mid-December, S&P/TSX Composite Index (INDEXTSI:OSPTX) stocks down more than 15 percent year-to-date underperform the index by nearly 4 percent. However, from mid-December to mid-January, those same stocks outperform the index by 3.6 percent.
“That outperformance is on top of gains the TSX reliably generates over that time frame,” Preston states. “So instead of only seeing tax-loss selling as a time to generate tax credits by dumping dogs, let’s look at the opportunity to profit.” You can watch her video on this topic below:
How to time tax-loss selling
Regardless of whether you’re buying or selling, Steve DiGregorio, portfolio manager at Canoe Financial, recommends that you act swiftly and aggressively as “liquidity will dry up.” DiGregorio earmarks the second and third week of December as the ideal window to sell or buy at a low point.
This is well ahead of the “Santa Claus rally” — the period around the last week of December when stocks tend to rise ahead of a healthier market in January.
For now, the year isn’t over yet, so whether you’re tax-loss selling or buying, there’s still time to talk to your accountant or financial advisor to determine which approach is best for you.
Do you have any strategies for tax-loss selling? Do you sell, buy or both? Let us know in the comments.
This is an updated version of an article first published by the Investing News Network in 2014.
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Securities Disclosure: I, Amanda Kay, hold no direct investment interest in any company mentioned in this article.