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Understanding the annual Tax-Loss selling phenomenon is no different. Because 50% of Capital Gains realized outside of a tax sheltered account are taxable, a common strategy is to sell investments that are at a loss in December for the offsetting Capital Loss. Since the advent and growth of various registered accounts beyond the RRSP (RESP and DRSP for example) and most notably the TFSA, we do see less of this annual event so the effect on the markets is less profound than it once was. However, with the three, four, and even five digit ROIs for some stocks on this industry, this industry may be particularly vulnerable to tax loss selling. Please refer again to the above image of the Canadian index’s Return … you will note the dip (circled in red) in late December of 2016. The important thing is to recognize why share prices may fall in December and to accept that it may not necessarily signal the beginning of a sell off / bear market.
December 27th is the last trading day for 2017 settlement. This article is an excellent primer on tax-selling. And from our friends at tax-tips is this link with some great tips and links to forms and other important information. For expert professional advice, please contact our monthly contributing writer Jason DeJean.
Hey wait a minute – this was titled Myth 3 but it was true so it is not a myth? It is half true as there is no need to “join them”. Selling shares for the sole purpose of tax planning rather than due to any company specific reason could be considered a rare buying opportunity for others. The myth lies in the “if you cannot beat them join them” mindset. If one feels this will happen to any of the stocks one owns then perhaps consider selling in advance anticipating to buy them back at a lower price. The risk of course is that there is no share price dip but one ever lost money selling for a profit. This tactic really only works for shares held in a registered account where there are no tax implications because outside of a registered plan may trigger the capital gain on the sale or tax-loss selling and buying back could result in triggering the 30-day rule if shares in that company are bought back within that time period.
Jason’s article this month focused on tax-loss selling
and is a must read for all investors.