One often reads or hears about year end tax loss selling and the deadline to execute these kinds of trades that comes along each December. Here’s what it’s all about.
Taxpayers who have taxable capital gains in the current year from selling securities or who own mutual funds or income trusts that will allocate taxable capital gains to them on the income tax slips they receive, must report this type of income on their 2012 tax return and of course pay tax. There is an opportunity to eliminate the tax that will otherwise be owed on these gains if losses can be triggered. Any unrealized losses in your portfolio cannot be used against these gains unless the losses become “realized”. To trigger the losses, the investment position must be sold, and not repurchased for at least 30 days. You can’t wait to do this until the last day the markets are open in December, because the date you tell your investment advisor to sell the position is not the date the sale is settled. Speak to your investment advisor to find out what date is the last day in December to execute a sale where the settlement date will still fall within the calendar year. Don’t wait to the last minute – do it a bit early!
One you have triggered the loss, it can be used to offset any gains you have for the year on a dollar for dollar basis.
This strategy is quite popular and gives rise to a phenomenon called “tax loss selling season” – typically in mid to late December.
Speak to your investment advisor about whether you should be doing this or not. The investment considerations may be at odds with the simple desire to reduce taxes on capital gains. And please remember; don’t let the tax dog wag the investor’s tail!