As we approach the end of 2024, investors are exploring the potential advantages of utilizing tax-loss selling. While the ideal scenario in investing is buying low and selling high, sometimes investments don’t perform as expected. However, all is not lost because investors have the opportunity to sell off investments that have resulted in losses by the end of the year. This strategy, known as tax-loss selling or tax-loss harvesting, allows investors to offset capital gains liabilities for the year and reduce their tax bill for 2025. Let’s delve into how tax-loss selling operates and explore the crucial tax-loss selling dates for investors in Canada, the US, and Australia.
How does tax-loss selling work?
- Capital Gain Offset: Tax-loss selling involves selling stocks at a loss to offset the capital gains earned on other investments. This process takes advantage of the fact that capital losses are tax deductible, helping reduce an investor’s tax liability.
- Focus on Investments with Losses: Tax-loss selling typically targets investments that have incurred significant losses. Since these sales could impact the price of securities, it’s crucial to navigate the market cautiously.
- Seasonal Considerations: Tax-loss selling often occurs towards the end of the year, particularly in November and December. This timing presents an opportunity to strategically purchase securities during the selling season and sell them after establishing the tax loss, potentially benefiting from future gains.
- Avoiding Wash Sales: Investors should be cautious of engaging in a "wash sale" by selling an asset at a loss, repurchasing the same stock, and attempting to evade taxes. Such practices are prohibited by the IRS, with a mandatory waiting period of 30 days before rebuying shares that were initially sold at a loss.
Important tax-loss selling dates for 2024
- Canada: The deadline for tax-loss selling in Canada is December 30, 2024. Transactions made after this date will be settled in 2025, impacting tax liabilities for the following year.
- United States: Investors in the US must complete tax-loss selling by December 31, 2024, as per the IRS guidelines.
- Australia: Australian investors have until June 30, 2025, marking the end of the 2024/2025 financial year, to engage in tax-loss selling activities.
While tax-loss selling presents numerous benefits, it also has its complexities and can shape investment opportunities throughout the selling season. As Gwen Preston of Resource Maven highlights, the period from mid-November to mid-December sees certain stocks underperforming the index, only to bounce back and outperform post the tax-loss selling period. Investors should assess the timing of tax-loss selling, considering the liquidity in the market and potential gains, as advised by portfolio manager Steve DiGregorio of Canoe Financial.
As the year draws to a close, consulting with financial experts to determine whether tax-loss selling or buying is the right approach remains crucial. Remember, the key to optimizing tax strategies is to stay informed and proactive. So, whether you’re looking to capitalize on tax-loss selling or explore other investment avenues, now is the time to plan your financial moves wisely.
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