With the end of the year looming, tax loss selling season is almost at hand. If you wok with a stockbroker, you may already be considering which stocks to get rid of before the end of the year.
Here are some things to keep in mind when tax loss selling.
Income Tax & Capital Losses
Capital losses can only be used to offset capital gains. If you sell a stock and realize a loss, the loss can only be used to reduce any capital gains incurred this year to zero. If you still have net capital losses, you have some choices: Carry them back and apply them to gains in the prior 3 years (2008, 2007 or 2006) or carry them forward indefinitely and use them in the future against capital gains.
Settlement Date & The Last Selling Day
If you buy and sell stocks, there are two transaction dates: Trade Date and Settlement Date. The trade date is the day you executed the trade. Settlement date is the date the securities showed up in your account.
For tax purposes the critical date is the settlement date. This means if you want to realize a loss for 2009 you must ensure that your trades settle in your account no later than December 31st. For stock and mutual funds, this means that the last selling date for the year is December 24th.
Beware Of Superficial Losses
If you re-purchase the same stock or mutual fund within 30 days of selling it, any loss you may have realized will be disallowed and the amount of the loss will be added back to your cost base. If you want to re-purchase the same share again, wait 31 days!
Transfers To RRSPs and TFSAs
If you are considering transferring your stocks to your RRSP or TFSA, be aware that you will not be able to claim the loss and the loss will be gone forever.
If you are thinking of selling a stock in your open account (non RRSP/TFSA) and purchasing it in your registered account (TFSA or RRSP), be aware that the superficial loss rules were changed a few years ago and now apply to RRSPs and TFSAs. The loss will be denied … forever.