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Superficial Losses: Gains & Loss on Identical Properties

Although the end of the tax year is over, here is the text of an email from a visitor to Canadian Tax Resource who has some questions about gains and losses on identical securities.

Question: While calculating capital gains/losses for the year on identical stocks, do I need to calculate the gain/loss at the time of every sale or only a total gain/loss on all transactions combined for the year? Let me give an example:

Suppose I bought and sold the same stock on many days from Jan to Sep 2008. I had no shares when I started the year and had no shares as of end Sep 2008. I made a net small gain on all these transactions. Then in November, I bought more of the same stock which I did not sell by Dec 31st. If I include the cost of this purchase to calculate the ACB for the year, my gain becomes a loss for the year, as the ACB per share of purchases exceeds the average selling price per share for the year.

When I file my taxes for 2008, should I report a gain that I made on the transactions between Jan & Sep or should I report a loss based on the transactions for the full year? Thanks.

The taxability of capital gains and use of losses on sales of identical securities is different.

If you sold the security and there was a capital gain (the selling price exceeded the cost), then that gain is taxable. The fact you re-purchased the security again within 30 days or purchased the security 30 days before the sale is irrelevant in this case since the capital gain is taken into income immediately.

If you sold a security and there was a capital loss (selling price was less than the cost) AND you purchased the security 30 days before the sale OR re-purchased it 30 days after the sale, then the loss is denied.

The amount of the loss is added to the cost of the security. This rule essentially re-sets the cost base to what it was before the superficial loss transaction took place.

When evaluating a series of transactions, you have to look at each sell in the tax year and evaluate it on its own before moving to the next sell.

I hope this helps.

Follow-Up Question: Thanks very much for the reply. Your website is great and has lot of helpful information.

One quick follow-up question: Does the same rule apply to day-trading?

Looking at the result of each sell transaction will be very difficult if someone is doing day trading in one stock. Many times there could be multiple buys and sells on the same day and hundreds of transactions in a tax year.

You have an option to make an election to treat all of your trading in securities as either capital or income related transactions. In other words you may elect to have all of your trading considered either capital gains or losses or as income transactions.

If you elect capital gains treatment, you are better off for capital gains since the tax is ½ the normal rate. Losses (non-superficial) are applied to gains and can be carried forward back three years and forward indefinitely and can be only used against capital gains.

With the income election your gains and losses are not considered capital. In this case 100% of the gain is included in income and taxed at the full rate. Losses are losses and you may have other deductions available since you will be considered to operating a business.

This election should not be taken without the advice of a professional since the election cannot be undone later. My thought is that if you have been taking capital gains over the years, it does not make sense to make the election because of one or two bad years. You may make your life easier in terms of calculating your gains or losses but you will pay twice as much tax.

I would suggest that you implement a tracking system using a spreadsheet. I will be a lot of work for the current tax year but each future trade you make you can enter it into the sheet making you life easier at tax time. You should have columns for the date, the time, the buy price, and the sell price.

Get Help!

If you speak to a professional about your tax situation you might want to ask them to establish the tracking system for you. The cost of the accountant [1] may be a few hundred dollars, but will be well worth the investment in the long run, especially if you are making multiple trades.