What is Tax-Loss Selling? Tax-loss selling, also known as tax-loss harvesting, is a strategy available to investors who have investments that are trading below their original cost in non-registered accounts.
These investments could be stocks, bonds, mutual funds and/or exchange-traded funds (ETFs).
The strategy involves selling these investments and using the subsequent capital loss to offset any capital gains incurred that tax year.
It's also possible to carry capital losses back into the previous three tax years and/or carry them forward indefinitely.
Sales of securities must settle within the calendar year in order to offset capital gains realized in the same year (or previous three years).
Remember, settlement dates are typically two business days after a sale is initiated, so the last day to tax-loss sell will typically be at least two days before the last day of December.
What if you want to buy your stock back after selling it? Hold on, there's an important rule to keep in mind.
The Superficial Loss Rule
When you sell an investment and trigger a capital loss, the superficial loss rule states that you can't deduct the capital loss if you buy (or purchase a right to buy) an identical security within 30 days of the settlement date of your sale transaction.
This means you can't purchase the security 30 days before or 30 days after your settlement date.
Violating the rule means your tax benefit would effectively be cancelled. https://www6.royalbank.com/en/di/hubs/investing-academy/article/tax-loss-selling/ki58kkpl