Tax-loss selling, also known as tax-loss harvesting, is a tax management strategy that helps investors reduce their taxable income by realizing (or ‘crystalizing’) losses on underperforming investments held in their non-registered accounts. This approach can be valuable for offsetting taxable gains, managing current or future tax liabilities, and optimizing a portfolio. Here’s a step-by-step breakdown of how it works:
- Sell an Investment at a Loss
For instance, if you bought shares of ABC Company at $50 and the current price is $40, selling them would realize a $10 per-share capital loss. - Apply the Loss to Offset Capital Gains
The realized loss can be used to reduce taxable capital gains from other investments in the same year. If there are no capital gains to offset, the loss can be carried back up to three years or forward indefinitely to apply against future gains. - Reinvest the Proceeds
After the sale, reinvesting the proceeds helps maintain market exposure. This reinvestment requires careful planning to comply with the superficial loss rule.
Navigating the Superficial Loss Rule
The superficial loss rule disallows a capital loss if you repurchase the same or an identical security within 30 calendar days before or after the sale. For example, selling shares of ABC Company at a loss and immediately buying them back would make the loss ineligible for tax purposes. In order for the switch to be eligible and avoid the superficial loss rule, investors must be careful not to purchase securities that offer identical exposure to the securities being sold.
To avoid this, investors have two options:
- Wait 30 Days before repurchasing the same security, which carries the risk of missing a potential price rebound.
- Reinvest in a Similar Security that is not considered the same or identical under tax laws, such as an ETF with exposure to a similar sector.
Important Considerations for Tax-Loss Selling
Tax-loss selling can be a valuable tool for managing your portfolio and tax obligations, but it requires careful planning. Keep the following in mind:
- Seek Professional Advice
Consult a tax professional to ensure your strategy aligns with your financial goals and complies with applicable tax regulations. - Monitor Deadlines
Pay attention to year-end deadlines if you want to apply losses to the current tax year. Remember, trade settlements typically occur two business days after a sale, so plan accordingly to ensure transactions are finalized on time.
This material is provided for informational purposes only. The information contained herein does not constitute, and should not be construed as, investment, tax, or legal advice. Specific investment decisions and strategies should be assessed in the context of an individual’s personal financial objectives, and professional advice should be sought for any particular circumstances.
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A word on trading liquidity for ETFs …
Hamilton ETFs are highly liquid ETFs that can be purchased and sold easily. ETFs are as liquid as their underlying holdings and the underlying holdings trade millions of shares each day.
How does that work? When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at net asset value plus a spread). The market maker then subscribes to create or redeem units in the ETF from the ETF manager (e.g., Hamilton ETFs), who purchases or sells the underlying holdings for the ETF.
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Commissions, management fees and expenses all may be associated with investments in exchange traded funds (ETFs) managed by Hamilton ETFs. Please read the prospectus before investing. Indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and does not take into account sales, redemptions, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Only the returns for periods of one year or greater are annualized returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
Certain statements contained in this website may constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Hamilton ETFs undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.
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[1] Footnote 1