‘Tis the season for tax loss selling

To ensure you are efficiently planning for the 2024 year end, we recommend reviewing your investment positions before the end of the year. If you have realized any capital gains from the sale of securities in non-registered accounts or from the sale of cryptocurrencies on account of capital, you might want to consider the strategy of tax loss selling (or selling your ‘losing’ positions to offset some of the gains).

The gist

Selling loss positions allows you to realize that loss in your portfolio. This is called a capital loss. These losses are tax assets as they offset capital gains in your portfolio (capital gains can only be reduced by capital losses).

If you have realized gains in the last three years (the limit on carrying back capital losses to apply against capital gains), selling losing positions before the end of 2024 will allow you to carry back the loss to one of the previous three years, resulting in a refund on the tax paid relative to the losses carried back. If you have capital gains realized in 2021, this is the last year to carry back losses and get refunded some of the tax you paid on those gains. You can carry forward capital losses from prior years indefinitely.

If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing.

Examples of tax loss selling

Example 1: Current year gains and current year losses

You have realized gains on the sale of some ETH of $50,000 in the current year. You also hold a position in a crypto project DOG that dropped in value during the year from $60,000 at cost down to $10,000, its current fair market value. Selling the DOG position at a $50,000 loss will fully offset the $50,000 gain realized earlier in the year from ETH.

This is a simple example that would be advisable if you felt the losing position was a lost cause and wanted to exit the position regardless. Other considerations here would be gas fees to exit the losing position. If the offsetting loss were much less and the benefit would be lost to gas fees, it would not be worth it to exit the position.

Example 2: Prior year gains and current year losses

You sold some shares of AAPL at a gain of $30,000 in 2022. Your investment advisor recommends “balancing” your portfolio according to your risk tolerance and long-term plan, and exiting certain positions. Any losses from the rebalancing can be carried back to 2022 to offset the gains from AAPL in that year, resulting in a refund of some of the tax paid in 2022.

Traps to avoid

Superficial loss rules

‍If you were to attempt to crystallize losses by selling a security or cryptocurrency, but then want to reenter the position, you must wait 30 days from the sale to the next purchase, otherwise you will be caught by the superficial loss rules. If a superficial loss is reported, the loss will be denied for tax purposes and will be added to the cost basis of the new position, effectively negating any tax benefit until you exit the new position. These rules apply to assets repurchased within 30 days be any “affiliated person” (spouses/common law partners, corporations controlled by you or a spouse, or trusts in which you or your spouse are a beneficiary).

Example 3: Superficial losses:

‍On December 19th, 2024 you sold all your position in ETH which had a cost of $10,000 for $6,000 triggering a capital loss of $4,000. On January 2, 2025, you repurchased the same amount of ETH back for $6,000. As you repurchased the ETH back within 30 days, the superficial losses rules will deem your loss in 2024 to be NIL and the cost base of the repurchased back to $10,000 ($6,000 cost + $4,000 of superficial losses).

‍Identical Property

‍The superficial losses apply even if you buy an identical property. Generally, properties are identical if they are the same in material respects, and general buyers would not prefer one property to the other. A common example is buying shares of a corporation vs units of a mutual fund trust are viewed as identical properties.

‍Registered accounts

‍Losses from transferring securities to a registered account (RRSP, TFSA, etc) are denied under the Tax Act. If you wish to transfer an asset from a non-registered account to a registered one, it is best to sell the security and realize the loss in the non-registered account (allowing for the loss to be applied against gains), then waiting the 30 days to repurchase the asset in your registered account to avoid the superficial loss rules.

‍Foreign exchange

‍A position in a US security may be in a loss relative to the USD cost basis and the current USD fair market value, however depending on the exchange rate, the position could potentially be flipped into a gain position. Be sure to translate both the cost basis in CAD, and the expected proceeds in CAD to determine whether a US denominated security is truly in a loss position.

The Skinny

If you have losers in your portfolio and gains that have been realized, the settlement date of the sale of the losers must be before December 31, 2024 to fully realize the losses for tax purposes. If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing. It literally turns a loser into a tax asset.  Something from nothing - that feels more like the holiday spirit.

2024 Updates

Capital Gains Inclusion Rate

Effective June 25, 2024, the capital gains inclusion rate was increased to 2/3 from 1/2 on all capital gains realized in a corporation, and to 2/3 on capital gains realized by an individual above a threshold of $250,000 (capital gains up to $250,000 remain at the 1/2 inclusion rate).

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This means that if you incur a loss and are subject to the 2/3 inclusion rate, carrying back the loss to a gain in previous years with a 1/2 inclusion rate will require an adjustment.

As well, depending on the timing of capital gains realized in 2024, you will have different inclusion rates.

From CRA - Capital Gains Inclusion Rate:

• Robert realizes a capital gain of $600,000 on June 1, 2024, a capital loss of $75,000 on July 25, 2024, and a capital gain of $475,000 on October 1, 2024.
• Robert has a capital gain of $600,000 in Period 1 on which the one-half inclusion rate would apply, resulting in taxable capital gain of $300,000.
• Robert has a net capital gain of $400,000 in Period 2. A one-half inclusion rate would effectively apply to the first $250,000, and a two-thirds inclusion rate would apply to the remaining $150,000, resulting in a taxable capital gain of $225,000 in Period 2.
  The total taxable capital gain for the 2024 tax year would be $525,000.