2022 is a year most stock market investors will want to put behind them. But there could be a silver lining in this year’s carnage for investors who dump their dogs before the year ends.
It’s called tax-loss selling and it brings an opportunity to use those equity market losses to recoup tax paid on capital gains in the past, or eliminate tax on capital gains in the future. Tax-loss selling permits capital losses from equity investments to be applied against taxes paid on capital gains as far back as three years, or into the future indefinitely.
If you haven’t paid tax on capital gains this year or the previous two years, those capital losses can be used to lower or eliminate tax on capital gains at any point in the future. Any qualified tax expert will tell you to never make investment decisions based solely on tax implications, and deciding what to sell for tax-loss selling is no different.
One thing to keep in mind: U.S. equities have taken a far bigger hit than Canadian equities so far this year, but the U.S. dollar has strengthen considerably against the Canadian dollar. Losses can be tempered by selling U.S. dollar denominated equities and converting the cash to Canadian dollars. As with any tax strategy, the Canada Revenue Agency has strict rules when it comes to tax-loss selling.
The tax savings from tax-loss selling, however, can generate further tax savings by shifting the proceeds from a non-registered account to registered accounts.
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