With the December 27, 2023, deadline fast-approaching, contact your Rothenberg Wealth Management Advisor to see if your investment portfolio can benefit from this strategy, and if you can save money on your 2023 personal income tax return.
Investing is the key to growing your wealth, but you can’t always expect to take profits from all your investments. There’s always some risk involved, and losses are inevitable. Tax-loss harvesting may sound like a fancy concept, but it’s a rather straightforward and highly effective strategy that can find a silver lining in those losses, when implemented by an experienced investment professional like a Rothenberg Wealth Management Advisor.
What is Tax-Loss Harvesting?
Tax-loss harvesting (also called tax-loss selling) involves selling an investment within a non-registered account that has depreciated in value and leveraging these losses to offset capital gains from other investments. The primary objective is to minimize the tax liability that comes with capital gains.
But wait, what are capital gains?
To understand tax-loss harvesting, it’s important to understand capital gains. You have a capital gain when you sell an investment for more than its purchase price, which means you make a profit.
In Canada, capital gains are included in your annual taxable income and taxed at your marginal tax rate. However, only 50% of the total capital gains is taxable.
Capital losses, on the other hand, are triggered when you sell an investment for less than what you purchased it for, meaning you are taking a loss.
Implementing Tax-Loss Harvesting
Not every investment will be profitable, but that’s the risk you accept when you make an investment. However, you can find a silver lining to losing investments with tax-loss harvesting.
With tax-loss harvesting, the strategy is to sell an investment that’s declined in value and losing money so you can use the loss to reduce the total amount of capital gains you would otherwise be taxed on when you file your personal income taxes.
Finally, you reinvest the proceeds from that initial sale in different investments and better position your portfolio going forward.
Example of the Power of Tax-Loss Harvesting
You buy XYZ stock for $1,000 and it’s now worth $2,000, so you sell it and trigger $1,000 in capital gains. You also bought ZYX stock for $800 but it’s now worth $200, so you sell it and trigger $600 in capital losses. You can net the capital gains and losses to report only $400 in capital gains on your tax return.
Since only 50% of the total capital gains are taxable, using the above example, only $200 in capital gains will be subject to your marginal tax rate. Without tax-loss harvesting, you would have to pay tax on $500 of capital gains from XYZ stock. As you can see, tax-loss harvesting as a strategy can actually help you save money on your tax bill.
The above example is relatively straightforward, using small quantities of securities and manageable investment amounts, but normally your portfolio will be more complex. You’re not just holding one type of security, your portfolio likely includes a diverse asset mix, including but not limited to stocks, ETFS and Mutual Funds.
Applicable Investments & Limitations
• Applicable Investments: Tax-loss harvesting can only be applied to investments held and sold within a non-registered account. This can include securities like individual stocks, bonds, ETF or Mutual Funds, which incur taxable capital gains. Tax-loss harvesting is not useful in registered accounts like a RRSP or TFSA, since they are tax-exempt.
• Superficial Loss Rule: You should not sell an investment at a loss and buy the same investment within 30 days before or after the sale, otherwise you cannot use the capital loss for current income tax purposes.
• Year-end deadline: To offset capital gains realized in a calendar year, losses must be settled within that same year. The last day for Canadian and U.S. tax-loss selling is December 27, 2023, for your 2023 income tax return.
The last day for Canadian and U.S. tax-loss selling is December 27, 2023. With the deadline fast approaching to take advantage of the potential tax benefits of tax-loss harvesting, contact your Rothenberg Wealth Management Advisor to get personalized support. Your Rothenberg Advisor will be able to help you make an informed decision about whether tax-loss harvesting is a strategy you can benefit from.