Profit From Tax-Loss Harvesting
Canadian stocks may go on sale soon because of the phenomenon known as tax-loss harvesting.
In June we wrote about the so-called “Sell in May and go away” adage that says investors can earn a better return during the winter than the summer. This theory was tested and proven to be reasonably accurate in several major global equity markets. “Sell in May” would have worked well again this year given the market’s summer turmoil.
Now we’re approaching another market anomaly, the so-called January Effect, which says we can expect superior returns then compared with any other month of the year. This maxim is especially true for medium and small companies, and tax-loss harvesting is the reason. Tax-loss harvesting is when investors sell shares at a loss to offset capital gains made elsewhere in their portfolio.
In Canada, share losses can be offset against capital gains made in the previous three years and can also be applied against gains on investment properties. Once sold, the shares cannot be repurchased within 30 days or the tax authorities may disallow the loss.
The year 2015 is shaping up to be an annus horribilis for investors in a range of Canadian stocks, especially those linked to the energy and mining sectors. After nursing such losses, many investors may decide to sell and claim the damage to cut their tax bill.
The typical tax-loss selling season peaks in November and the first part of December, when strange share prices sometimes appear, especially for less-liquid stocks. So investors in Canadian stocks should know that certain companies may be prime targets for tax-loss harvesting. This may serve as an early warning signal of potential price weakness and more importantly create excellent opportunities for astute investors.
The accompanying table lists many of the more popular dividend-paying stocks (some have recently suspended or reduced dividend payments) that have declined 20% or more over the past year. They are prime candidates for tax-loss harvesting.
Of the stocks listed, four currently belong to our Dividend Champions Portfolio and are marked with asterisks in the table. Assuming that these companies continue to be fundamentally healthy, we would buy them if their prices are forced down by aggressive tax-loss selling in November and December. If that happens, we’ll let you know so you can take advantage of the temporary discount.
In June we wrote about the so-called “Sell in May and go away” adage that says investors can earn a better return during the winter than the summer. This theory was tested and proven to be reasonably accurate in several major global equity markets. “Sell in May” would have worked well again this year given the market’s summer turmoil.
Now we’re approaching another market anomaly, the so-called January Effect, which says we can expect superior returns then compared with any other month of the year. This maxim is especially true for medium and small companies, and tax-loss harvesting is the reason. Tax-loss harvesting is when investors sell shares at a loss to offset capital gains made elsewhere in their portfolio.
In Canada, share losses can be offset against capital gains made in the previous three years and can also be applied against gains on investment properties. Once sold, the shares cannot be repurchased within 30 days or the tax authorities may disallow the loss.
The year 2015 is shaping up to be an annus horribilis for investors in a range of Canadian stocks, especially those linked to the energy and mining sectors. After nursing such losses, many investors may decide to sell and claim the damage to cut their tax bill.
The typical tax-loss selling season peaks in November and the first part of December, when strange share prices sometimes appear, especially for less-liquid stocks. So investors in Canadian stocks should know that certain companies may be prime targets for tax-loss harvesting. This may serve as an early warning signal of potential price weakness and more importantly create excellent opportunities for astute investors.
The accompanying table lists many of the more popular dividend-paying stocks (some have recently suspended or reduced dividend payments) that have declined 20% or more over the past year. They are prime candidates for tax-loss harvesting.
Of the stocks listed, four currently belong to our Dividend Champions Portfolio and are marked with asterisks in the table. Assuming that these companies continue to be fundamentally healthy, we would buy them if their prices are forced down by aggressive tax-loss selling in November and December. If that happens, we’ll let you know so you can take advantage of the temporary discount.
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