Reducing the pain of a losing stock
A popular expression goes something like, “when you’re
stuck with a lemon, make lemonade”. This philosophy
can apply somewhat to a losing stock. If you’re stuck
with a loser, a strategy called “tax loss selling”
can help turn your lemon into lemonade.
Here’s how.
If you’re holding securities that are down in price,
and . . .
If you feel that prospects for their price to recover are
not good, and . . .
If you have capital gains to report this year, or . . .
If you have reported taxable capital gains within the past
three years . . .
. . . then you may be able to
Avoid some capital gains tax this year or. . .
Recover some of the taxes you paid on capital gains within
the last three years.
Tax loss selling involves disposing of securities that are
down (and you feel are not coming back soon) to trigger capital
losses to offset your capital gains.
You must first apply them to any capital gains in your current
year. However, if your losses are larger than your gains,
or if you have no gains in the current year, you can apply
them to capital gains in any of the last three years.
Be careful not to break the superficial loss rules
The government has created “superficial loss”
rules to prevent you from creating an artificial tax loss.
Let’s say you’re planning to take a tax loss on
your shares in Lemons Inc. and you’ve decided to sell
them on December 15.
There is a 30-day period both before and after that date
in which you may not buy shares in Lemons Inc. If you do,
the tax loss will be disallowed. It will also be disallowed
if you, your spouse or a corporation you control still holds
Lemons Inc. 30 days after the tax loss sale.
However, the superficial loss rules do not apply to children,
so you can sell your Lemons Inc. and have your child immediately
buy it. You get to claim the loss and any future capital gain
will be taxed in your child’s hands, not yours. However,
keep in mind that attribution rules make this quite complicated
so you should seek expert advice.
And there is one last caution. Keep in mind that most security
transactions take three business days to settle after the
trade is entered. So if you want to do any last minute tax
loss selling, remember this three-day period to be sure you
complete the trade before the new year. To be safe, check
with your broker.
Important information about our financial planning services can be found at the bottom of our
homepage.
|
