Tax-loss selling tips and tactics
It might seem a bit early to talk about “year-end tax planning.” In truth, though, that’s a bit of misnomer. "Year-end" simply refers to the Dec. 31 deadline for the tax year. Many key tax-saving strategies need to be set up and implemented well before year-end if you want to benefit from them in the current year. One of these is the strategy of tax-loss selling.
Tax-loss selling is the strategy of triggering losses on investments before Dec. 31 to offset capital gains that you may have on other investments for 2018. So, the real question is, How do you trigger a loss?
One easy way is to look at the stocks and other investments in your portfolio now, to see which are in a loss position or likely to be by year-end (i.e., where the current market value is less than the original cost). By selling investments in a loss position, you can trigger a capital loss for tax purposes.
Yes, it means that you aren’t making any money from these sales, but it also means that the resulting loss can be used to offset capital gains, which at the end of the day translates into cutting your tax bill.
Sounds simple doesn’t it? But before you place your sell order between now and the end of the year, here are some things to watch for:
* Do you need a tax loss? If you don’t have any capital gains as far back as 2015, there’s no need to run out and sell a loser just for its tax loss. That’s because capital gains can be claimed only against capital losses. For most investors, the result will be a capital loss. A capital loss cannot shelter income from your job, a business, or even an employee stock option benefit. So, if you have no capital gains in the current year, or in the last three years (capital losses can be carried back three years, to 2015), then there’s no point in tax-loss selling. (A possible exception applies to losing investments in Canadian private corporations devoted to active-business endeavours – this could include over-the-counter stocks.)
* Do you have a tax loss? Don’t assume that you are sitting on losses. Find out whether you actually have a tax loss to begin with. This depends on the tax cost of your investment – or as we tax drones call it, your “adjusted cost base.” One important thing to bear in mind is that you must calculate your tax cost on a weighted average basis for all identical investments.
Let’s say that you bought 2,000 shares of Xco at $20 per share and another block of 1,000 at $40. Let’s also suppose that you decided to take your lumps on the second purchase, and you sold the block of 1,000 at $30. Your loss would be $10 a share, right? Wrong! You have to calculate your cost on the weighted-average basis. Since most of your shares were bought when the stock was below its selling price, the weighted average cost per share would be $36.67 – that is (2,000 x $20 + 1,000 x 40)/3,000, so that apparent $10 loss would turn into a $3.33 gain per share!
You must use this approach even if you used a different broker for each purchase.
Happily, though, initial purchases by other family members will not figure in the weighted average calculation. For this reason, it may make sense to have other family member make the initial purchases, in order to “isolate” cost base in each per- son. In the previous example, if your spouse had purchased the second block at $40 and had sold it, your spouse’s adjusted cost base would have been based on the $40 amount.
Previously published in The Fund Library on August 23, 2018 by tax and estate planning lawyer, Samantha Prasad.