As the end of the year approaches, investors should review their investment portfolio’s realized and unrealized Capital Gains and Losses for tax planning opportunities. For tax purposes, a loss on a sale of marketable securities is typically treated as a Capital Loss. Capital Losses can only be applied to reduce Capital Gains.
Capital Losses can be carried forward indefinitely or carried back 3 years, so you won’t lose their tax benefit if you don’t have Capital Gains in the current year. You just cannot realize the tax benefit until you have Capital Gains.
Some strategies for Capital Gain and Capital Loss planning include:
– If you have unused capital losses, you could sell shares with unrealized capital gains to use these losses.
– If you have realized Capital Gains, you will pay tax if you take no action. In this case, you could concurrently sell shares with unrealized Capital Losses. You can then apply the realized losses against the gains, reducing your tax bill for the year.
Regardless of the tax consequences, your priority for investing should be in making sound investment decisions. Do not sell what you consider to be a good investment simply for the above reasons. Furthermore, selling a stock and buying it back right away can cause issues. The first is transaction costs, as you will lose this money outright. The second is the superficial loss rule. This tax rule is triggered when you, or an affiliated party, buy shares of a particular stock 30 days before or after you sell that stock at a loss, and you, or an affiliated party, continue to own some shares of that stock after the sale. When this rule applies, the realized Capital Loss is denied and added to your new shares’ cost base. In other words, you won’t be able to claim the Capital Loss until you sell the new shares of that stock.
All investment planning decisions should be made only after consulting with your investment advisor. For assistance in determining the tax implications of these decisions, contact your MacKay advisor for a comprehensive review of your individual tax situation.
The material is general in nature and is not intended to replace the need for specific professional advice. Contact a MacKay LLP advisor for assistance.